Vol. 16, No. 32 • www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of August 7, 2011 • $2

� F I N A N C E & E C O N O M Y

� L A N D & L E A S I N G

� G O V E R N M E N T

page4

Murkowski working Alaska issuesincluding OCS, NPR-A, ANWR

Runners participate in the “Deadhorse Dash” on July 29, one ofnumerous fun runs held throughout the summer by various compa-nies on the North Slope. The “Deadhorse Dash” was sponsored byCarlile Transportation Systems, Era Aviation, Northern Air Cargo andNANA Oilfield Services. In the background: Nabors 7ES drilling rig atDrill Site 13.

‘Deadhorse Dash’JU

DY

PA

TRIC

K

Jobs up: Cook Inlet could be onverge of boom, North Slope busy

The oil patch appears to be growing.The oil and gas industry in Alaska

employed 13,600 people in June, accord-ing to recent figures from the AlaskaDepartment of Labor and WorkforceDevelopment. That’s up from 13,200 inMay of this year and up from around12,300 at this point last year.

While the figures show jobs decliningslightly in the Anchorage-area — to 2,550so far this year compared to around 2,600at this point last year — and increasing in the North Slope,those numbers don’t tell the whole story about the employmentpicture in Alaska, according to Bill Popp, CEO of the

Wood Mac: LNG could pay at $75oil with state-owned pipeline

The Alaska Gasline Port AuthorityLNG project looks economic, accordingto a study done for AGPA by WoodMackenzie.

The study compared AGPA’s All-Alaska Gasline Project with other proj-ects proposing to ship to Asian markets.

“The economics for LNG from Valdezare superior to the comparable projects,”AGPA’s general counsel, Bill Walker,said in a July 28 press release.

The Wood Mackenzie study compared the economics of aproject with a line to Valdez paralleling the trans-Alaska oilpipeline with nine other liquefied natural gas projects beingadvanced or under construction in Australia, Western Canadaand the Lower 48.

see JOB GROWTH page 17

see WOOD MAC STUDY page 19

BILL POPP

BILL WALKER

Inlet producer jostledField ops unaffected as Miller, Alaska subsidiary deal with stock drop, lawsuits

By WESLEY LOYFor Petroleum News

Cook Inlet Energy LLC and its Tennessee-based parent, Miller Energy Resources Inc.,

have enjoyed considerable success since becomingan Alaska oil and gas producer in late 2009.

They grabbed a package of west Cook Inletassets out of bankruptcy, restored a number ofshut-in wells to production, and brought the off-shore Osprey platform back to life. Along the way,Miller’s stock price went from a few pennies to afew dollars.

In recent days, however, the good fortune hasseemed to turn a bit for Miller and Cook InletEnergy.

Miller has reported that some of its recentfinancial filings with the U.S. Securities and

Exchange Commission “should not be reliedupon,” and must be corrected.

The company’s shares, traded on the New YorkStock Exchange, have taken a beating, in part dueto a negative online article about Miller. The stockclosed Aug. 3 at $3.46 a share. Through most ofJuly the stock traded well above $7.

Aside from these troubles, Miller and CookInlet Energy have been hit with two federal law-

David Hall, Cook Inlet Energy chiefexecutive, told Petroleum News on Aug. 3

the recent run of difficulties hasn’thindered the company’s operations in the

field.

see INLET PRODUCER page 20

Central Mac buzz growsConocoPhillips says it is focused more on liquids; speculation on Husky oil find

By GARY PARKFor Petroleum News

ConocoPhillips has done more than anyone sofar to explain its interest in July’s blockbuster

land sale in the Central Mackenzie Valley of theNorthwest Territories that attracted successful bidsfrom four industry majors, all of them anchor-fieldgas owners in the Mackenzie Gas Project.

But the spotlight is squarely fixed on HuskyEnergy, which laid out C$376 million for twoparcels totaling about 533,600 acres — by far thebulk of the C$534 million in winning bids, whichlends weight to those who think Husky may havestruck pay dirt and gained the attention of theindustry majors in the process.

Clayton Reasor, vice president, corporate andinvestor relations, told a second-quarter confer-ence call that ConocoPhillips is targeting a Canolshale play.

“The unconventional that we are going afterwill be more from a liquids perspective than from

The latest spending spree on leases,coming amid an uncertain outlook for the

Mackenzie Gas Project, has stirredspeculation that Husky may have made a

substantial oil find in the CentralMackenzie Valley …

Advocating UN sea lawUS Coast Guard, US Navy and State Department argue for treaty ratification

By ALAN BAILEYPetroleum News

For a number of years the absence of the UnitedStates from the list of countries party to the

United Nations Convention on the Law of the Seahas been the subject of intense debate inside theU.S. and a certain amount of puzzlement else-where.

And at a hearing of the U.S. SenateSubcommittee on Oceans, Atmosphere, Fisheriesand Coast Guard on July 27 officials from the U.S.Coast Guard, the U.S. Navy and the StateDepartment again questioned why the U.S. has not

see MAC BUZZ page 17

see SEA LAW page 18

International cooperationfor Navy and USCG

As the Arctic climate warms and Arctic seaice recedes, potentially opening new Arctic searoutes, the U.S. Navy and the U.S. CoastGuard have been engaged in discussions withother Arctic nations over how to cooperativelyset rules for ocean use in the Arctic, seniorofficers from both of these arms of the U.S.armed forces told the U.S. SenateSubcommittee on Oceans, Atmosphere,

see COOPERATION page 18

2 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

contents Petroleum News North America’s source for oil and gas news

8 Arctic sea ice melted rapidly in July

6 Shell plan passes environmental assessment

9 FWS publishes incidental take regs

9 Out to block Northern Gateway

14 Subsistence polar bear quota affirmed13 DNR issues ROW lease for ASAP project14 Oiled ring at FS-2 flare pit removed

17 Hearing delayed on BP probation matter

19 Statistics: Alaska Oil Industry Employment Statewide and North Slope Borough 2000-2010

19 Statistics: Alaska’s Average Daily Oil and NGL Production Rate 1960-2010

EXPLORATION & PRODUCTION

ENVIRONMENT & SAFETY

GOVERNMENT

PIPELINES & DOWNSTREAM

FINANCE & ECONOMY

10 AK objects to EPA wetlands guidelines

State says the proposed new guidelines will extend federal jurisdiction over land and water in areas normally managed by Alaska

11 New oil & gas industry air standards

EPA’s proposed new air quality regulations target shalegas development, gas production & transmission, NGL production and oil storage

14 July ANS production down 19% from June

Maintenance shutdown of trans-Alaska oil pipelinein mid-month plus other maintenance results in July average of only 462,407 bpd

NATURAL GAS

4 Murkowski working Alaska energy issues

State’s senior senator pushing development in federal areas from OCS to NPR-A, ANWR with President Obama, Secretary Salazar

6 Who needs the revenues more?

Ongoing debt crisis influences debate over whether the states deserve a cut of federal revenues from offshore energy development

5 Juggling pipeline options to Gulf Coast

Oil sands producer Cenovus says it has no fallback for Keystone XL; Suncor mulls pipeline reversal, rail, possible exports to Asia

7 Engineer details aboveground preference

Louis Kozisek of State Pipeline Coordinator’s Office looks at advantages, disadvantages of aboveground vs. HDD line under Nigliq

Jobs up: Cook Inlet could be on verge of boom, North Slope busy

Wood Mac: LNG could pay at $75 oil with state-owned pipeline

ON THE COVERInlet producer jostled

Field ops unaffected as Miller, Alaska subsidiary deal with stock drop, lawsuits

Central Mac buzz grows

ConocoPhillips says it is focused more on liquids; speculation on Husky oil find

Advocating UN sea law

US Coast Guard, US Navy and State Department argue for treaty ratification

reach new horizons.

SIDEBAR, Page 1: International cooperation for Navy and USCG

SIDEBAR, Page 5: Making the oil sands case

PETROLEUM NEWS • WEEK OF AUGUST 7, 2011 3

Rig Owner/Rig Type Rig No. Rig Location/Activity Operator or Status

Alaska Rig StatusNorth Slope - Onshore

Doyon DrillingDreco 1250 UE 14 (SCR/TD) Prudhoe Bay, Maintenance BPSky Top Brewster NE-12 15 (SCR/TD) Doyon Yard for Modification ENIDreco 1000 UE 16 (SCR/TD) Milne Point MPK-33 BPDreco D2000 UEBD 19 (SCR/TD) Alpine CD4-210 ConocoPhillipsAC Mobile 25 Prudhoe Bay A-25B BPOIME 2000 141 (SCR/TD) Kuparuk Standby ConocoPhillipsTSM 7000 Arctic Wolf #2 In Nisku, AB Available

Kuukpik 5 In Marine Transit to Barrow North Slope Borough

Nabors Alaska DrillingTrans-ocean rig CDR-1 (CT) Stacked, Prudhoe Bay AvailableAC Coil Hybrid CDR-2 Kuparuk 3H-10C ConocoPhillipsDreco 1000 UE 2-ES Prudhoe Bay Stacked out AvailableMid-Continental U36A 3-S Prudhoe Bay Stacked out AvailableOilwell 700 E 4-ES (SCR) Prudhoe Bay X-22A BPEmsco Electro-hoist 7-E (SCR-TD) Prudhoe Bay DS12-27A BP Dreco 1000 UE 7-ES (SCR/TD) Prudhoe Bay PBU 13-27B BPDreco 1000 UE 9-ES (SCR/TD) Has been released by Brooks Range Available

PetroleumOilwell 2000 Hercules 14-E (SCR) Prudhoe Bay Stacked out AvailableOilwell 2000 Hercules 16-E (SCR/TD) Prudhoe Bay Stacked out AvailableOilwell 2000 17-E (SCR/TD) Prudhoe Bay Stacked out AvailableEmsco Electro-hoist -2 18-E (SCR) Stacked, Deadhorse AvailableEmsco Electro-hoist Varco TDS3 22-E (SCR/TD) Stacked, Milne Point AvailableEmsco Electro-hoist 28-E (SCR) Stacked, Deadhorse AvailableEmsco Electro-hoist Canrig 1050E 27-E* Stacked at Deadhorse PioneerAcademy AC electric Canrig 105-E (SCR/TD) Stacked at Deadhorse AvailableAcademy AC electric Heli-Rig 106-E (SCR/TD) Stacked at Deadhorse AvailableOIME 2000 245-E Oliktok Point OP18-08 ENI

*Nabors 27-E will be under contract at Oooguruk/Nuna for Pioneer this winter

Nordic Calista ServicesSuperior 700 UE 1 (SCR/CTD) Prudhoe Bay Drill Site E Conducting Rig BP

Maintenance Superior 700 UE 2 (SCR/CTD) Prudhoe Bay Well Drill Site 7-13c BPIdeco 900 3 (SCR/TD) Kuparuk Well 1C-104 ConocoPhillips

North Slope - Offshore

BP (rig built & being assembled by Parker)Top drive, supersized Liberty rig Endicott SDI for Liberty oil field BP

Nabors Alaska DrillingOIME 1000 19-E (SCR) Oooguruk ODSK-13 Pioneer Natural ResourcesOilwell 2000 33-E Prudhoe Bay Stacked out Available

Cook Inlet Basin – OnshoreAurora Well ServiceFranks 300 Srs. Explorer III AWS 1 Rigging up to drill on NCU 10 Aurora Gas

Cook Inlet EnergyAtlas Copco RD20 34 Undergoing winterization Cook Inlet Energy

at W. McArthur River UnitDoyon DrillingTSM 7000 Arctic Fox #1 Beluga 224-23T ConocoPhillips

Marathon Oil Co. (Inlet Drilling Alaska labor contractor)Taylor Glacier 1 Susan Dionne #7 Buccaneer Alaska

Nabors Alaska DrillingContinental Emsco E3000 273 Stacked, Kenai AvailableFranks 26 Stacked AvailableIDECO 2100 E 429E (SCR) Stacked Available Rigmaster 850 129 Kenai Stacked out Available

Rowan CompaniesAC Electric 68AC (SCR/TD) Demobilizing and prepping Pioneer Natural Resources

to ship to Lower 48

Cook Inlet Basin – Offshore

Chevron (Nabors Alaska Drilling labor contract)428 M-11 Steelhead Platform Chevron

XTO EnergyNational 1320 A Coil tubing cleanout planned off Platform XTO

A in the near futureNational 110 C (TD) Idle XTO

Mackenzie Rig StatusCanadian Beaufort Sea

SDC Drilling Inc.SSDC CANMAR Island Rig #2 SDC Set down at Roland Bay Available

Central Mackenzie Valley

Akita/SAHTUOilwell 500 51 Has left the NWT Available

Alaska - Mackenzie Rig ReportThe Alaska - Mackenzie Rig Report as of August 4, 2011.

Active drilling companies only listed.

TD = rigs equipped with top drive units WO = workover operations CT = coiled tubing operation SCR = electric rig

This rig report was prepared by Marti Reeve

Baker Hughes North America rotary rig counts*July 29 July 22 Year Ago

US 1,908 1,916 1,586Canada 395 376 363Gulf 37 37 16

Highest/LowestUS/Highest 4530 December 1981US/Lowest 488 April 1999Canada/Highest 558 January 2000Canada/Lowest 29 April 1992

*Issued by Baker Hughes since 1944

The Alaska - Mackenzie Rig Report is sponsored by:

JUDY

PAT

RICK

By STEVE QUINNFor Petroleum News

I t took less than 24 hours after the U.S.House and Senate agreed to a debt ceil-

ing compromise and Alaska’s Sen. LisaMurkowski was back to addressing energyissues.

She was quickly backing a finding thatcalls for testing directional drilling tech-niques that could tap into the 10.5 billionbarrels of oil in the non-wilderness sectionof the Arctic National Wildlife Refuge.

Murkowski is completing her 10th yearin the Senate and beginning her secondelected term.

Since claiming a landmark write-invictory over Tea Party-backed Joe Miller,Murkowski has been on the front lines ofmajor energy issues.

Now in a third year as ranking member

of the Senate Energyand NaturalResourcesCommittee, topicssuch as ANWR, off-shore developmentand increaseddomestic productionremain paramount.

Spanning 10 timezones, her work hastaken her to Anchorage for meetings withShell officials, to Greenland andGirdwood to discuss Arctic issues andeven the White House for a one-on-onemeeting with President Obama.

She spoke with Petroleum News aboutthis hectic pace that began almost imme-diately in January.

Petroleum News: What did you learn

from that meeting with Shell and whatmade you have that meeting?

Murkowski: My takeaway was I wasencouraged by what I saw with regards totheir thoroughness of a plan.

They had a plan prior to Macondo. Ihad been briefed on it. I had been briefedsubsequent to it. But after the DeepwaterHorizon incident, I said to Shell and oth-ers said to Shell and the folks within Shellsaid we are going to have to go back andrevisit our plan in light of this.

They did that. I was encouraged bywhat I saw in terms of their attempt toreally anticipate all that they would needin the event of any kind of a spill, anykind of an incident. What particularlyimpressed me was their recognition that ifsomething goes wrong it’s not as if youhave a flotilla of fishing boats that arestanding by who can helpyou go out and lay boomlike they did in the Gulf ofMexico or even as we didwith the Exxon Valdez. Youdon’t have that in the Beaufort and theChukchi.

I think their effort to anticipate every-thing is what particularly impressed mewith the presentation that they gave me.

Petroleum News: There are still con-cerns about no proven way for cleaningup for the Arctic in the event of a spill.How do you address that?

Murkowski: Keep in mind: this is notShell’s first foray into northern waters,into the Arctic. They do have a level ofexperience that other operators don’t.

You have phrased it no proven way. Ithink it is fair to say here in this country,our laws prohibit us from doing an actualtest, basically creating a spill so we canclean it up to demonstrate our capabilities.We can’t do that in the actual waters. It’sall under contained situations or controlledsituations that are not in the environment.But there are other nations who have donethat testing. Norway has led that. Theextent to which there has been a study ofthis is important to recognize.

One of the things I think is still out-standing is that I understand Alaska maybe the only state or be one of a few wherethere is not preauthorization for dispersantuse. This is an issue the Coast Guard haspresented to me and I’ve talked about itwith Shell. I think we saw with Macondothat the whole issue of heavy doses of theapplication at the seabed surface, what

was this going to mean? They clearly hadan understanding of the effect of disper-sants, but not necessarily at this concentra-tion. There were a lot of questions. Thosequestions caused concerns at the time. Iwould like to have a little more certaintywhen it comes to the applications of dis-persants Arctic waters.

Petroleum News: The amendment toget a greater share of revenue for oil pro-duced close to our coasts didn’t advance.Do you think it still can?

Murkowski: We had high hopes thatwe might be able to advance an amend-ment to the OCS reform bill a couple ofweeks ago that would provide for revenuesharing to coastal states. This is an effortthat Sen. (Mary) Landrieu and I have beenworking for quite a period of time. We

made some headway. Therewas bipartisan support. It hasbeen expanded or broadenedto include not only the oiland gas energy production,

but the effort is to make this energy neu-tral. In other words if there is energy pro-duction that comes from wind energy off-shore, those coastal states would be ableto share in those benefits as well. It’s aneffort that is ongoing. We did not movethat to a vote when we had the OCSreform bill before the (energy and naturalresources) committee. That is still on hold.I anticipate that perhaps after we get backfrom the August recess we will have anopportunity to revisit again.

Petroleum News: How productive didyou find your meetings with the president?Do you believe there is genuine movementtoward treating increased domestic pro-duction as a priority rather than as someput it as hindrance?

Murkowski: Anytime you have theopportunity to sit one-on-one with thepresident — I don’t care if it’s a presidentfrom my party or the opposition party —anytime you have that one-on-one I thinkis good, it’s a positive. The president gaveme a good amount of time. We visited forabout 45 minutes. I was able to walk himthrough not only the issue with Shell, butwith NPR-A and ANWR and show himthe disposition of Alaska’s lands, broughtin a map that shows the wilderness areas,the parks areas, the BLM lands. It wasimportant for him to know and understand

4 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

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CORRECTIONNew DEC deputy commissioner

The Alaska Department of Environmental Conservation’s newdeputy commissioner, Lynn Kent, was incorrectly identified as aman in the July 31 issue of Petroleum News.

Kent, most recently director of DEC’s Division of Water, is awoman. LYNN KENT

� G O V E R N M E N T

Murkowski working Alaska energy issuesState’s senior senator pushing development in federal areas from OCS to NPR-A and ANWR with President Obama, Secretary Salazar

SEN. LISA MURKOWSKI

see MURKOWSKI Q&A page 15

PETROLEUM NEWS • WEEK OF AUGUST 7, 2011 5

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By GARY PARKFor Petroleum News

Suncor Energy and Cenovus Energy,two of Canada’s largest oil sands pro-

ducers, have placed their bets on the bestchance to ship diluted bitumen to the U.S.Gulf Coast.

For Suncor, the oil sands giant, itinvolves hedges should U.S. authoritiesturn down TransCanada’s Keystone XLapplication; for Cenovus, planningassumes approval of XL.

Suncor’s mix of alternatives includesEnbridge’s proposed Northern Gatewaylink to Asia, which is every bit as uncer-tain as XL. Failing that, it is eyeing thereversal of an existing crude oil line fromQuebec to Ontario to get WesternCanadian crude to Montreal refineriesand joining the growing movement todeliver crude by rail.

For TransCanada, there is no wafflingor wavering.

Chief Executive Officer Russ Girlingsaid July 28 that all of the pipeline com-pany’s planning and actions are predicat-ed on receiving a United States presiden-tial permit by the end of 2011 for the $7billion, 500,000 barrel per day project.

He told analysts that TransCanada hasprocured all the pipe and equipmentneeded for XL and has agreements withthe four largest unions in the U.S.

Shovel-readyThe company also continues to negoti-

ate with landowners along the pipelineroute and has secured voluntary agree-ments with more than 82 percent oflandowners, Girling said.

“We are truly shovel-ready, our con-struction plans are in place for early 2012and we are anxious to get moving for-ward,” he said, targeting mid-2013 for thestart of deliveries.

Cenovus, which has firm service con-tracts in place for unspecified volumes onXL, is counting heavily on XL to siphonoutput from the oil sands, aiming for aquadrupling of net production to 500,000bpd by 2021, said Chief Executive

Officer Brian Ferguson. “There is some danger in accelerating

your growth if you don’t have a place toput it. But we are not planning on anyscenario other than Keystone XL gettingapproved in a fairly timely way,” he said,adding that Cenovus does not have anyother options, while conceding thatEnbridge and Kinder Morgan might pro-vide outlets to the British Columbia coastfor tanker shipment to Asia.

Suncor Chief Executive Officer RickGeorge said his company has amplepipeline capacity for several years.

“Keystone XL is more about the futureand more about debottlenecking the sys-tem so we don’t see these large differen-tials between WTI and Brent prices. Idon’t think there’s been nearly enoughfocus in the U.S. around that issue,” hesaid.

“At the end of the day let’s hope theU.S. State Department (which mustdecide on the presidential permit becauseXL crosses the Canada-U.S. border) doesthe right thing for the energy balance ofNorth America, but there are otheroptions out there,” George said.

Rail alternativeThe options are steadily embracing the

steel rail as an adjunct to steel pipe, effec-tively reviving the sole means of movingcrude oil until the late 1800s when JohnD. Rockefeller developed the use ofpipelines.

The rail alternative is “kind of goingcrazy,” said Glen Perry, president of AltexEnergy, which has pondered a pipelinefrom Alberta to the Gulf Coast and haspartnered with Canadian NationalRailway Co. to promote the use of rail.

He said crude buyers such as refinersand asphalt plants in California, Texas,Louisiana and on the East Coast havemade proposals, while about eight pro-ducers are now moving their heavy oil byrail, five of them transporting bitumen.

While unwilling to name the compa-nies, Perry said about 5,000 bpd ofWestern Canadian production is beingshipped by rail.

Pete Sametz, president of ConnacherOil and Gas, said his company has beentransporting diluted bitumen by rail sincethe first quarter, reporting that rail com-panies have been responsive toConnacher’s needs.

Rock Energy is currently sending 500bpd directly to Gulf Coast refineries,adding as much as $6-$7 per barrel to itsnetbacks in the process.

Rail terminals planned Utah-based Savage Cos. said it plans

to build rail terminals across the U.S.within three to five years — starting witha 90,000 bpd facility at Trenton, N.D. —to handle demand from Bakken crudeproducers. US Development Group saidit plans to double capacity at its St. James,La., crude rail terminal to 260,000 bpd bythe end of 2011.

Nathan Savage, a senior vice presidentof refinery and sulfur services for Savage,said both coast and the upper Midwestwould be logical outlets for the NorthDakota terminal, adding a destination willbe nailed down within six months.

� P I P E L I N E S & D O W N S T R E A M

Juggling pipeline options to Gulf CoastOil sands producer Cenovus says it has no fallback for Keystone XL; Suncor mulls pipeline reversal, rail, possible exports to Asia

Making the oil sands case The Canadian government has rolled out its heavy artillery in support of the

Keystone XL pipeline, with Natural Resources Minister Joe Oliver spending achunk of the last week of July lobbying decision makers in Washington, D.C.

In the boldest show yet of support for the TransCanada project — raising ques-tions, in the process, about whether the government of Prime Minister StephenHarper will do the same thing for Enbridge’s Northern Gateway venture — Olivermade his pitch to top level officials and business leaders.

He discussed the controversial $7 billion pipeline, connecting the Alberta oilsands with Gulf Coast refineries, with White House officials, Energy SecretaryStephen Chu and Republican Reps. Doc Hastings of Washington and Ed Whitfieldof Kentucky.

Oliver told them that XL could deliver 30 million barrels of oil sands crude tothe United States every two months, matching the volume that the U.S. recentlywithdrew from its emergency stockpiles to offset a shortfall from Libya.

“We remain optimistic that the (U.S.) government understands that this is avery important project for the United States to provide secure energy from a reli-able friend and partner,” he said, estimating the pipeline would generate more

see PIPELINE OPTIONS page 6

see OIL SANDS CASE page 6

than $20 billion in new construction forthe U.S. economy, along with 20,000construction and manufacturing jobs.

Oliver said Canada is confident thatsafety and environmental issues, current-ly under scrutiny during an assessment bythe U.S. State Department andDepartment of Energy “can be addressedin a satisfactory manner.”

U.S. senators have been told that thefirst stage of Keystone to Cushing, Okla.,has spilled some oil in recent weeks, butTransCanada Chief Executive OfficerRuss Girling delivered a sharp rebuke onJuly 28 to those claiming the spill origi-nated from Keystone pipeline ruptures.

He said the dozen incidents involvedleaks aboveground at pump stations and

not the Keystone pipeline in the ground,adding the total volumes were measuredin gallons, not barrels.

“Like any large project, there arealways bugs to work out and we willwork through those startup issues,”Girling said.

In answer to strident environmentalopposition, Oliver noted his governmenthas just earmarked C$50 million to mon-itor the potential harm from oil sands pro-duction on water, air, plants and animals,arguing Alberta oil fields currentlyaccount for only 0.1 percent of globalgreenhouse gas emissions and match theper-barrel emissions from heavy oil pro-duced in California and Saudi Arabia.

He said future regulations will requireproducers to recycle 90 percent of waterand use on average no more than one bar-rel — compared with six barrels at someoperations — of water to produce onebarrel of oil.

—GARY PARK

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6 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

However, John Auers, with the con-sulting firm of Turner Mason, estimatedthat rail costs are $7-$8 per barrel forlarge volumes and $11-$12 for smallervolumes, compared with an average $6per barrel for pipeline transportation.

While that debate builds, the jostlingover XL continues, with a Republican-sponsored bill directing the Obamaadministration to make a decision on XLby Nov. 1 passing the House ofRepresentatives on July 26 by a vote of279-147.

The State Department said it expects,as scheduled, to complete its delibera-tions and decide on a permit before theend of the year. �

continued from page 5

PIPELINE OPTIONS

Contact Gary Park through publisher@petroleumnews.com

Contact Gary Park through publisher@petroleumnews.com

continued from page 5

OIL SANDS CASE

� G O V E R N M E N T

Who needs the revenues more?Ongoing debt crisis influences debate over whether the states deserve a cut of federal revenues from offshore energy development

By ERIC LIDJIFor Petroleum News

Coastal states seeking sympathetic ears as they onceagain asked for a share of federal royalties from

energy production in the outer continental shelf couldn’thave picked a tougher time to testify before the HouseNatural Resources Committee on July 27.

The title of the hearing, State Perspectives onOffshore Revenue Sharing, suggested a discussionfriendly to the idea of letting the states have some of therevenue that the federal government gets from energyproduction off its coasts, but coming in the middle of anepic battle over reducing the federal deficit, the debatequickly became a referendum on many topics mostlyunrelated to oil and gas development.

The federal government currently gives Texas,Louisiana, Mississippi and Alabama 37.5 percent of therevenue it collects from offshore developments in theGulf of Mexico, but legislation making its way throughboth the House and the Senate would extend that provi-sion to all coastal states, and possibly even include rev-enue from offshore renewable energy projects.

Those in favor of extending the provision say thatstates on the front line of offshore development needmoney to bolster environmental and emergency responseprograms, but those opposed to revenue sharing arguethat the OCS belongs to the American public as a whole,and that the states already get revenue from onshore and

near shore projects.

Incentive to productionCommittee Chair Rep. Doc Hastings, R-Wash., said

revenue sharing would create an incentive to open moreoffshore areas to energy development, leading toincreased domestic production, higher employment ratesand greater federal and state revenues.

Those who opposed the idea, he said, generallyopposed offshore drilling entirely, but did so behind theclaim that revenue sharing would diminish federal cof-fers during a time when the federal deficit is a top prior-ity. “This is quite a contorted argument to make — thatrevenue sharing unfairly gives away federal revenue,when if they had their way, we wouldn’t be collectingrevenue from offshore drilling in the first place,” Hastingsaid.

Hastings said his office is reviewing several propos-als for revenue sharing and would present legislation tothe committee for further discussion sometime afterAugust.

Ranking Member Rep. Edward Markey, D-Mass.,said current proposals are “like putting straws into therevenues of the federal government and allowing thestates to suck it out,”

Noting that the federal government could currentlyuse the revenue it has already given to the Gulf Coast,Markey said, “What we’re doing here today is finding away to take more revenues out of the federal government

— the revenues that are paid by oil companies to the fed-eral government for the right to drill for oil off the coast-line of the United States.”

Markey plans to introduce legislation to rescind theGulf Coast revenue sharing program, but said any futurerevenue sharing program should be “twinned” with leg-islation that increases the safety requirements for off-shore development. (Sen. Lisa Murkowski recently pro-posed a revenue sharing amendment to an offshore safe-ty bill in the Senate).

States on the front linesThe conversation is in some sense premature because

of the lack of existing energy development on the outercontinental shelf outside of the Gulf of Mexico.

In Alaska, OCS development is stalled while the fed-eral government considers permit applications and thefederal courts labor over outstanding cases. In Virginia,energy companies are one step back, waiting for a feder-al lease sale to gain drilling rights. The U.S. Departmentof the Interior removed that sale from its 2007-12 OCSlease sale program following the Deepwater Horizon oilspill in the Gulf of Mexico last year.

That didn’t stop Virginia Secretary of NaturalResources Doug Domenech from testifying in favor ofrevenue sharing, saying states should get a cut of the rev-enue because “states are on the front lines of the effects

see REVENUES page 8

EXPLORATION & PRODUCTIONShell plan passes environmental assessment

On Aug. 4 the Bureau ofOcean Energy Management,Regulation and Enforcementreleased its environmental assess-ment for Shell’s plan to drillexploration wells in Alaska’sBeaufort Sea, starting in 2012.BOEMRE has made a finding ofno significant impact for Shell’splan, a finding that represents thecrossing of a major permitting hurdle for Shell’s proposal to drill two wells inits Sivulliq prospect and two wells in its Torpedo prospect. Both prospects areon the west side of Camden Bay, offshore the North Slope, to the east ofPrudhoe Bay.

“The conditional approval of our plan of exploration is welcome news and

see SHELL PLAN page 7

BOEMRE has made a finding of nosignificant impact for Shell’s plan, afinding that represents the crossing

of a major permitting hurdle forShell’s proposal to drill two wells inits Sivulliq prospect and two wells in

its Torpedo prospect.

By KRISTEN NELSONPetroleum News

The State of Alaska and federal agen-cies which are part of the federal-

state Joint Pipeline Office have told theU.S. Army Corps of Engineers that its2010 decision in favor of a horizontaldirectionally drilled crossing at the NigliqChannel of the Colville River is incorrect.

The pipeline crossing at the NigliqChannel should be on a bridge, the corpswas told. That was the approach chosenby ConocoPhillips Alaska, which plans todevelop its CD-5 drill site, which will bethe first oil and gas development in theNational Petroleum Reserve-Alaska,across the Nigliq Channel of the ColvilleRiver from the company’s Alpine facili-ties, where oil from CD-5 would beprocessed.

The engineering considerations behindthe opinion of the state and the JPO fed-eral agencies were laid out by LouisKozisek, P.E., chief engineer in the StatePipeline Coordinator’s Office, in an Apriltechnical opinion which evaluates theadvantages of the two types of crossings— aboveground or buried under the chan-nel.

Kozisek, who has three engineeringdegrees and professional engineeringlicenses in mechanical and civil/structuralengineering in Alaska, has 32 years expe-rience with the trans-Alaska oil pipelineand North Slope oilfield facilities, includ-ing work for pipeline and oil companies,for an engineering consultant and for fed-eral and state government.

As chief engineer with SPCO hisresponsibilities include engineering eval-uation of most of the long-distancepipelines in Alaska, including the Alpinepipeline and the HDD crossing at theColville River.

Prevention of spillsKozisek said he placed special empha-

sis on environmental considerations andon the importance of selecting the leastenvironmentally damaging practicalalternative, and gave the greatest weightto prevention of oil spills over the life ofthe crossing.

The need to design for the long termwas also emphasized, he said.

North Pole “operators and engineersare currently struggling with maintainingaging oil production facilities andpipelines. Many design decisions madedecades ago have only demonstratedproblems with the passage of years anddecades. Experience has shown that thedifficulties of maintaining integrity overyears of service have too often been giveninsufficient consideration in the originaldesign,” Kozisek said.

Maintenance and repair; surveillanceHe said the aboveground option has

important advantages over an HDDinstallation for maintenance and repair.“It keeps the pipeline easily accessible,and lowers the costs and reduces theresponse times.”

The importance of design whichallows the easiest and simplest monitor-ing and repair has been clear over the last30 years with respect to North Slopepipelines and facilities, Kozisek said.

He said the aboveground option “isgreatly preferred for surveillance andmonitoring.”

By keeping the pipe high above-

ground, crossing the channel on a bridge,nearby traffic can monitor it for leaks andinspection crews can easily and inexpen-sively reach suspect areas, he said.

While in-line inspection or smart pig-ging can mitigate some of the disadvan-tages of surveillance and monitoring of aburied HDD crossing, aboveground linescan be monitored both by in-line inspec-tion, external corrosion direct assessmentand other methods and the methods “canbe correlated to improve the certainty ofcondition assessments.”

Kozisek said simple visual inspectionis perhaps “the most important surveil-lance,” and with the pipeline on a bridge“anticipated to be heavily used by the res-idents of Nuiqsut,” it will be visible toresidents crossing to work at Alpine andfor subsistence hunting.

This is in addition to sophisticatedequipment used by ConocoPhillips.

“None of these methods, which couldbe used to spot a leak at the Nigliq cross-ing quickly, can be used for an under-ground HDD installation,” Kozisek said.

Hydrology, including ice and scourWhile the HDD option may appear to

be the most benign for the hydrology ofthe channel because it does not interferewith the flow path of the channel, “it doeshave an Achilles’ heel,” Kozisek said:where the pipeline goes underground.

Because of relatively flat terrain in thearea, it is difficult to locate the transitionto an area of higher elevation, whichwould protect it from floodwaters.

He said it would be “paramount todesign HDD to withstand a higher floodstage, so that spring breakup would notimpinge upon this vulnerable area, poten-tially rupturing the pipeline.”

Armored revetments are a possibilityhe said, or locating transitions on higherground if practical, but “reduction of thisrisk by engineering countermeasures isnot certain prior to more engineeringbeing completed on this option.”

While the HDD option “appears mod-erately superior for resistance to prob-lems caused by flooding, ice and scour,”this cannot be “fully determined until

conceptual or preliminary engineering foran HDD crossing is finished.”

Internal and external corrosionThe aboveground bridge option is

“greatly superior to the belowgroundoption” for internal corrosion because theHDD line has the potential for increasedaccumulation of water and sediment andincreased corrosion they often cause,Kozisek said.

Many of the recent flowline andpipeline spills on the North Slope haveinvolved corrosion, he said. “Correctengineering to reduce the likelihood ofcorrosion is paramount. It can be arguedthat many of the high-profile oil leaksfrom pipelines on the North Slope couldhave been prevented had the pipe seg-ments been designed to reduce the accu-mulation of sediments.”

The aboveground design is superiorfor internal corrosion because at lowervelocities some of the water and somesediments would drop out and remain inthe bottom of the pipe and an HDD cross-ing at the Nigliq Channel could have anelevation drop of as much as 60 to 70feet, “far greater than the drops in similar

pipelines on the North Slope,” and about10 times the elevation changes in roadand caribou crossings, “which are knownto be at higher risk for corrosion.”

He said that typical elevation changesin three-phase pipelines are from three to12 feet.

The aboveground option is also pre-ferred to HDD for external corrosion,Kozisek said, because of the “potentialproblems of accelerated corrosion due togroundwater” for an installed line “orcoating damage during boring or installa-tion.”

External corrosion of a buried lineunder a river has a greater range of risks,including unknowns in the in situ condi-tions and possible damage to the coatingduring installation.

Risks of corrosion at the Colvillecrossing were mitigated by design fea-tures, he said, and while design featureshave the potential to reduce external cor-rosion, they have limitations, and suchtechnological fixes are “for increasedrisks that largely do not exist on theaboveground option.”

PETROLEUM NEWS • WEEK OF AUGUST 7, 2011 7

� P I P E L I N E S & D O W N S T R E A M

Engineer details aboveground preferenceLouis Kozisek of State Pipeline Coordinator’s Office looks at advantages, disadvantages of aboveground vs. HDD line under Nigliq

see NIGLIQ LINE page 13

adds to our cautious optimism that wewill be drilling our Alaska leases bythis time next year,” said Shellspokesman Curtis Smith in an Aug. 4press release. “We believe the Bureauof Ocean Energy Management,Regulation and Enforcement wasthorough in its scientific and technicalanalysis of our plan, and we look for-ward to continued progress as we pur-sue the permits necessary to drill.”

The permits that Shell still needsbefore it can embark on its drillingprogram include an EnvironmentalProtection Agency air quality permitfor its drilling vessel and attendantfleet. On July 22 EPA issued a draft

permit for the Kulluk, the floatingdrilling platform that Shell expects touse in the Beaufort Sea. Shell’s Arcticoffshore air permits have been thesubject of multiple appeals over aperiod of several years.

As part of its analysis of Shell’splans BOEMRE has concluded thatthere is no likelihood of a very largeoil spill from a well blowout duringShell’s operations, given the smallnumber of planned wells; the very lowincidence of blowout events; and theuse of up-to-date spill prevention andresponse techniques.

See full story in Aug. 14 issue.—ALAN BAILEY

continued from page 6

SHELL PLAN

Contact Alan Bailey at abailey@petroleumnews.com

of offshore leasing, not the federal gov-ernment.”

Louisiana is no stranger to either off-shore development or revenue sharing.Garret Graves, chair of the CoastalProtection and Restoration Authority ofLouisiana, said that since Louisiana actedas a “guinea pig” for early offshore devel-opment efforts that have since brought$150 billion into the federal treasury, it isentitled to a share of the rewards.

He noted that the federal governmentalready gives states a cut from onshoreproduction.

“Every single program that exists todaywhere revenues are produced from energyproduction on federal lands, those rev-enues are shared back with the states,”Graves said.

Graves challenged Markey on theimpact of the existing offshore revenuesharing program. While Markey said the2006 bill gave the Gulf Coast states around$150 billion in federal revenues, Gravessaid Louisiana received only $222,000 thisyear. (The debate appears to concern pro-visions in the bill that use revenue projec-tions through a certain date and then revertto actual revenues. Rep. Jeff Landry, R-La., said the Congressional Budget Officeestimated the program would cost less than$20 billion over 50 years.)

Graves argued that revenue sharingallowed the states to prepare for spills andhurricanes at the local level, thereby miti-gating the amount the federal governmentwould end up paying in the future torespond to those disasters. “You can’tafford to not share the revenues,” heargued. “Congress spent $150 billionresponding to Hurricane Katrina.”

Alaska: ‘only fair to share’Although Alaska officials did not attend

the hearing, Gov. Sean Parnell submittedwritten testimony asking for all coastalstates to get the same 37.5 percent grantedto the Gulf Coast, and for an additional12.5 percent to be set aside for renewableenergy projects.

“It is not only fair to share part of therevenue from offshore development withcoastal states, it is a vitally important partof an overall strategy,” Parnell wrote onJuly 26. “Communities in coastal stateslike Alaska are often concentrated incoastal areas. Development of offshoreresources will require large, often compli-cated, construction projects. Such devel-opment increases demands on ports, trans-portation services, fuel supplies, pipelineand transmission corridors, and other vitalinfrastructure.”

Landry noted that not only do statesbear most of the impact during oil spillsfrom federal waters, but they also maintaininfrastructure and production used by thewhole country.

“This is an environmental bill. Revenuesharing protects the environment,” he said.

Sharing ‘downright foolish’As the deficit debate raged on in other

rooms on Congress, Democrats in theHouse Natural Resources Committeefound an unlikely alley: Taxpayers forCommon Sense.

The group said existing revenue shar-ing programs for onshore developmentmade sense because drilling took placewithin state lines, but that offshore devel-opment occurred under federal waterslocated well outside the physical bound-aries of coastal states.

Additionally, the federal governmentmanages OCS development using federaltax dollars and therefore “all Americansget revenues from federal waters,” RyanAlexander, president of Taxpayers forCommon Sense, said. She added thatexpanding the program and reducing fed-eral revenues during a debt crisis would be“downright foolish.”

Alexander also questioned whether rev-enue sharing would actual create an incen-tive for additional drilling, since oil com-panies would pay the same amount ineither scenario.

An issue of states’ rights?The hearing, though, quickly became a

referendum about issues unrelated todrilling.

While some members of the committeespoke about the need for revenues to supportenvironmental issues such as migratorybirds or the need to support military installa-tions, Rep. Rush Holt, D-N.J., appeared toconnect the issue to the nuances of federal-ism, referring to events in the 1860s, pre-sumably the Civil War, that led Americans tostart referring to the United States as a singleentity, rather than as a collection of entities.

He asked if coastal states would prefer toremove the federal government entirely.

“Would you say that you wouldn’t belooking for the resources of the UnitedStates of America — that these areVirginia’s resources: Virginia should get therevenue? Virginia should have the responsi-bility for any clean up?” Holt askedDomenech, specifically.

Rep. Scott Tipton, R-Colo., said thatopposition to revenue sharing showed feder-al overreach. “There seems to be a real men-tality inside this Beltway that Washingtonneeds money more than our states, than ourcommunities, than our individuals,” he said.

Rep. Jeff Duncan, R-S.C., made the pointmuch more explicitly.

“This really gets down to the root of theunion and states’ rights, to some degree,”he said. �

8 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

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ENERGYIDEAS

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Alaska’s Engineering Professionals

ENVIRONMENT & SAFETY

Arctic sea ice melted rapidly in JulyThe total extent of the Arctic sea ice shrank rapidly in July, causing the extent to

fall below the level recorded in July 2007, the year that saw the lowest ever Arcticsea-ice minimum, according to the National Sea and Ice Data Center. The minimumextent normally occurs in September, as the summer ice melt transitions into the win-ter freeze up — presumably the question of whether a new minimum extent recordwill be set this year will depend on weather conditions in August and September.

NSIDC attributes the rapid July melt to persistent high pressure over the northernBeaufort Sea, a phenomenon that led to above average temperatures over much ofthe Arctic Ocean. Air temperatures over the North Pole have been 11 F to 14 F aboveaverage for the time of year, although temperatures over the Kara Sea were lowerthan average during the first half of July, NSIDC said.

The sea ice extent is particularly low in the Barents Sea, the Kara Sea, the LaptevSea, Hudson Bay and Baffin Bay, NSIDC said. NSIDC also said that satellite data isproviding evidence that the annual ice melt is starting earlier than normal in someregions, with the subsequent formation of water pools on the ice surface acceleratingfurther melting.

There may also be a new trend for relatively high snow falls in the NorthernHemisphere in late autumn, winter and early spring, followed by a rapid snow meltin May and June. Following this year’s snow melt, summer snow cover in theNorthern Hemisphere is the second lowest on record, NSIDC said.

—ALAN BAILEY

Contact Eric Lidji at ericlidji@mac.com

continued from page 6

REVENUES

By GARY PARKFor Petroleum News

T he tentacles of the NationalGeographic have latched firmly on to

the Canadian oil sands.Two years after the magazine carried a

photo spread of industrial tailings ponds —the oil sands sector’s black eye — to high-light the impact on traditional aboriginallands and northern Alberta’s boreal forest, ithas returned to the theme, this time concen-trating on Enbridge’s Northern Gatewayproject in an article titled “Pipeline ThroughParadise.”

Northern Gateway proposes a pipelineto deliver 525,000 barrels per day of oilsands crude from Alberta to the deepwaterBritish Columbia port at Kitimat, largely forexport to Asian refineries, and a parallel lineto import 193,000 bpd of diluents toimprove the efficient pipeline transportationof heavy crude oil and bitumen.

Adding to the intense opposition toNorthern Gateway, National Geographicsaid local First Nations and surroundingrain forests “have been caught up in a greatgeopolitical oil game. The Northern gate-

way isn’t just a pipeline. It’s Canada’s bid tobecome a global player in the petroleummarket.”

The article said the “issue is no less crit-ical for the Great Bear Rainforest, a wildstretch of western red cedar, hemlock andspruce forest that runs 250 miles downBritish Columbia’s coasts. Whales, wolves,bears, and humans thrive in the rich marinechannels and forest of the Great Bear,whose boundaries have never been precise-ly defined.”

The magazine also lays out the 2006sinking of B.C. Ferries Queen of the North(with the loss of two lives) and notes that oilis still leaking from the submerged vessel,suggesting that could also be the fate oftankers operating out of Kitimat.

Doug Neasloss, an aboriginal wildlifeguide, is reported as saying that “we don’twant another Exxon Valdez on our shores.”

Enbridge supports protected areaA spokesman for Enbridge voiced dis-

appointment that National Geographicmade little use of “extensive” informationhis company supplied, notably coveringmeasures planned for pipeline safety andthe navigation of coastal waters.

He said Enbridge endorses what seemsto be the magazine’s objective of creatingsupport for turning the Great BearRainforest into a protected area, whichtankers between Kitimat and the PacificOcean “would not interfere with in anyway,” given that Kitimat is outside theGreat Bear area.

Enbridge has already promised toinvest in new navigational aids along theB.C. coast, while the Canadian CoastGuard has promised to build several newmaritime radar stations as part of the proj-ect.

Canada’s National Energy Board willembark on quasi-legal hearings next yearand is expected to deliver its verdict inlate 2012.

In the meantime, leaders of five First

Nations, in a letter to the EdmontonJournal, asked Albertans to support theirconcerns about spills from a NorthernGateway pipeline, noting that 80 nationsin British Columbia and others acrossWestern Canada have voiced their oppo-sition.

They said a pipeline and tankers “willexpose indigenous and non-indigenouscommunities from the Pacific coastacross to Alberta to the risk of pipelineand supertanker spills.”

Under international law, indigenouspeoples have the right to say “no” to suchdevelopments on their territories, whichinclude 25 percent of Northern Gateway’sroute, they argued.

“Nobody should doubt the authenticityof our opposition,” the chiefs said.

“Our nations are the wall this pipelinewill not break through,” said Chief LarryNooski of Nadleh Whut’en. �

PETROLEUM NEWS • WEEK OF AUGUST 7, 2011 9

� P I P E L I N E S & D O W N S T R E A M

Out to block Northern Gateway

Contact Gary Park through publisher@petroleumnews.com

ENVIRONMENT & SAFETY

FWS publishesincidental take regs

The U.S. Fish and Wildlife Service’sAlaska Region said Aug. 2 that inciden-tal take regulations for the non-lethal,incidental take of small numbers ofpolar bears and Pacific walrus associat-ed with ongoing oil and gas activities inthe Beaufort Sea and the adjacent north-ern coast of Alaska have been publishedin the Federal Register.

The agency said the regulations, inplace since 1993, have been successfulin minimizing the effects of industrialactivities on polar bears and walrus,while monitoring the levels of suchinteractions.

The Marine Mammal Protection Actprotects polar bears and Pacific walrusin Alaska by prohibiting “take” of theseanimals, and by providing for specificexceptions to the prohibition, includinga provision allowing U.S. citizens totake small numbers of marine mammalsincidental to specified activities.

The MMPA authorizes the Secretaryof the Interior to allow, upon request, thenon-lethal and incidental, but not inten-tional, taking of small numbers ofmarine mammals by U.S. citizensengaged in specific activity (other thancommercial fishing), within a specifiedgeographic region.

Incidental take regulations can beissued for up to five years if the taking islimited to harassment.

The agency said it was petitioned bythe Alaska Oil and Gas Association todevelop the regulations and said thatactivities under the regulations mustadopt measures to minimize any adverseimpacts to marine mammals, their habi-tat and their ability for Alaska Nativesubsistence use. Monitoring and report-ing requirements are also specified.

The regulations announced Aug. 2were proposed on March 11; they gointo effect on Aug. 3 and remain effec-tive through Aug. 3, 2016.

—PETROLEUM NEWS

10 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

� G O V E R N M E N T

AK objects to EPA wetlands guidelinesState says the proposed new guidelines will extend federal jurisdiction over land and water in areas normally managed by Alaska

By ALAN BAILEYPetroleum News

In the Alaska state administration’s latest foray againstwhat it sees as federal overreach in the management

of the state’s lands and natural resources, the administra-tion has voiced strong objections to proposed new feder-al water and wetlands guidelines published by theEnvironmental Protection Agency.The proposed guidelines rework thedefinition of what constituteswaters protected by the U.S. CleanWater Act, expanding the scope ofthe definition and potentially creat-ing a need for U.S. Corps ofEngineers and EPA permits forplanned activities impacting water-ways and wetlands previously con-sidered outside federal jurisdiction.

Any requirement for federal per-mitting also triggers the need for a review under theNational Environmental Policy Act, a procedure that canlead to a requirement to develop an environmentalimpact statement.

Significant concerns“The State of Alaska has significant concerns about

the draft guidance, including the validity of formulatinga critical component of permitting processes throughguidance rather than through formal rulemaking, as wellas the short time frame in which the federal agencieshave allowed public comment,” wrote Gov. Sean Parnellin a July 30 letter to the EPA and the Corps of Engineers.

The controversy relates to what are commonlyreferred to as “the waters of the United States,” a termencapsulating the scope of waterways and wetlands sub-ject to federal permitting but unfortunately lacking com-plete clarity it its definition. The term clearly encom-

passes waters that are navigable for interstate or interna-tional commerce, but has also been applied to tributariesof these waters and adjacent wetlands. Given the possi-bility of environmental contamination in one waterwaymoving into another waterway, just how far from “tradi-tionally navigable” waterways should the scope of fed-eral jurisdiction extend?

The U.S. Supreme Court has ruled in three legal chal-lenges to the scope of Clean Water Act jurisdiction, withthose rulings extending the scope of U.S. waters to “rel-atively permanent, standing or flowing bodies of water,”and to include any wetlands that could significantlyimpact the chemical, physical and biological integrity ofany waterway that falls within the scope of the act.

Bringing into lineEPA says that it is now bringing its guidelines for

determining the scope of U.S. waters into line with theSupreme Court decisions.

In addition to traditional navigable waters, relativelypermanent tributaries to those waters and wetlands adja-cent to the waters, the new EPA guidelines want agencyfield staff to determine whether additional tributaries,wetlands adjacent to tributaries and certain other openwaters fall under the scope of the Clean Water Act.

Wetlands or waters would fall within the scope of theact “if they, either alone or in combination with similar-ly situated waters in the region, significantly affect thechemical, physical, or biological integrity of traditionalnavigable waters or interstate waters,” EPA wrote in itsdraft guidelines document.

The state, in addition to its concerns about the exten-sion of federal jurisdiction, says that the guidelines willprovide an avenue for litigation by those who want to seemore federal involvement in environmental permitting.Alaska has more wetlands than all other states combined,the state said in written comments on the proposedguidelines.

Staggering overreach“The consequences of the application of the proposed

guidance will be staggering in terms of federal over-reach, infringement on states’ traditional land and waterresource management role, permitting expenditures, andproject delays,” the state wrote. “This guidance willundoubtedly lead to increased litigation, including morecitizen suits where the EPA and Corps may decide not toassert jurisdiction.”

EPA allowed a 60-day comment period for the newguidelines, a period that the state says is much too shortfor adequate discussion of such a complex and far-reach-ing issue. The state, with its huge areas of wetlands, isalso miffed that EPA has not consulted it over the pro-posals. And the state thinks that EPA has grossly under-estimated the cost of implementing the guidelines, giventhat the guidelines would impact several permitting pro-grams.

“The fact that EPA and the Corps are willing to rushin and further commit enormous staff and monetaryresources to a legally binding process founded on infor-mal guidance while the nation is dealing with a fiscal cri-sis is astounding,” Parnell said in his July 30 letter.

Need for formalityIn its comments on the guidelines the state said that

undefined terminology in the guidelines will serve toconfuse rather than streamline the permitting process.And the specification of federal jurisdiction over water-ways should be developed through a formal rulemakingprocedure, rather than as informal guidelines, the statesaid.

“Notwithstanding the agencies’ claim that the guid-ance is not a rule, is not binding, and does not have theforce of law, once finalized, the agencies fully expectfield staff to rely upon the guidance to make jurisdic-

GOV. SEAN PARNELL

see EPA OBJECTIONS page 11

By ALAN BAILEYPetroleum News

O n July 28 the U.S. EnvironmentalProtection Agency issued proposed

new air emissions regulations for the oiland gas industry. The new regulationsaddress reductions in the emissions ofwhat are known as volatile organic com-pounds, or VOCs, as well as emissions ofsulfur dioxide and toxic materials thatcause cancer and other serious medicalproblems.

The EPA is inviting public commentson its proposals — under the terms of theClean Air Act the agency must determinefinal rules by Feb. 28, 2012.

Hydraulic fracturingThe proposals include for the first time

emissions standards for hydraulic fractur-ing techniques of the type used in thedevelopment of shale gas wells.Companies using hydraulic fracturing innew or existing gas production wellswould be required to install reducedemissions completions, also known as“green completions.” This type of com-pletion uses technology that separates andcaptures gas and liquid hydrocarbons thatwould otherwise escape during the flowback of fracturing fluids and other mate-rials. When gas separated in this way can-not be captured for production it wouldbe flared, unless the flaring poses a safe-ty hazard.

As well as reducing the emissions ofVOCs, the use of green completionswould reduce the emission of methane, apotent greenhouse gas, according to anEPA fact sheet.

Centrifugal compressors used to pushnatural gas through gas pipelines wouldrequire dry seal systems to limit VOCleaks, while reciprocating compressorswould be subject to new maintenancerequirements. Pneumatic controllers,operating in various types of gas process-ing and transmission system and typical-ly using high-pressure natural gas, wouldbecome subject to VOC emissions limits.Operators of condensate and crude oilstorage tanks above a certain throughputcapacity would have to reduce VOCemissions from the tanks by 95 percent.

And new performance standardswould apply to leak detection and repairrequirements for natural gas processingplants and to sulfur dioxide emissionsfrom plants of this type. EPA is also pro-posing changes to the standards for theemission of cancer-causing toxic materi-als from oil and gas production opera-

tions.

95 percent reductionAccording to the EPA fact sheet “the

proposals would cut smog-formingvolatile organic compound emissions bynearly one-fourth across the oil and gasindustry, including a nearly 95 percentreduction in VOCs emitted from new andmodified hydraulically fractured gaswells.”

And, by reducing air pollution whilealso causing industry to recover mar-ketable material from its operations, the

proposed rules would be extremely costeffective, the EPA fact sheet says.

“EPA estimates the combined annualcosts of meeting the proposed require-ments would be $754 million in 2015,”the fact sheet says. “The estimated valueof the natural gas and condensate thatwould be made available for sale is $783million — a net savings of $29 millionwhen the rules are combined.”

Environmental organizations and pub-lic health groups have responded to theEPA action with enthusiasm.

“EPA’s proposed clean air protectionsare a trifecta: they reduce harmful air pol-lution, prevent waste of a domestic ener-gy source, and payback the companies bypreventing leaks and venting of naturalgas, a valuable commodity,” said RamonAlvarez, senior scientist with theEnvironmental Defense Fund.

“EPA understands that reducing airpollution from oil and gas not only pro-

tects public health, but prevents massivewaste, namely of methane,” said ErikSchlenker-Goodrich, director of theWestern Environmental Law Center’s cli-mate and energy program. “This is asmart rule that will help ensure that theproduction of oil and gas resources isconstrained within necessary limits as wemake our urgent transition to truly cleanenergy from the sun, wind, and water.”

API reviewingSabrina Fang, media relationships rep-

resentative for the American PetroleumInstitute, told Petroleum News in an Aug.1 email that API will review the proposedrules to ensure that they do not inadver-tently create unsafe operating conditions;that they are cost effective; that they pro-vide new public health benefits; and thatthey do not stifle natural resource devel-

PETROLEUM NEWS • WEEK OF AUGUST 7, 2011 11

tional determinations about whether awater or wetland is subject to federaljurisdiction,” the state comments say.

Parnell said that the state remainsready and willing to collaborate on devel-oping regulations to enhance environ-mental programs, several of which thestate itself administers.

“Such efforts help protect our nation’swater and resource management objec-tives, as Congress directed under theClean Water Act,” he said. �

continued from page 10

EPA OBJECTIONS

Contact Alan Bailey at abailey@petroleumnews.com

As well as reducing the emissionsof VOCs, the use of green

completions would reduce theemission of methane, a potent

greenhouse gas, according to anEPA fact sheet.

� G O V E R N M E N T

New oil & gas industry air standardsEPA’s proposed new air quality regulations target shale gas development, gas production & transmission, NGL production and oil storage

see AIR STANDARDS page 13

12 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

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Reliability“The reliability (certainty of design) of

an aboveground crossing is greater thanthat of an HDD crossing,” Kozisek said,with more work needed to prove an HDDcrossing.

The HDD crossing under the ColvilleRiver done for the Alpine pipeline was, hesaid, to the best of his knowledge, the firstHDD installation in a permafrost area —and remains the only one.

The “vast majority” of pipeline cross-ings on the North Slope are aboveground,“reinforcing the idea that it is the triedand true method.”

ARCO Alaska, which built Alpine anddid the Colville HDD crossing, told thepress that feasibility studies for the cross-ing took three years and cost $3 million,Kozisek said.

“The statement that an HDD crossingat the location (the Nigliq Channel) is fea-sible, without additional engineeringanalysis, is questionable,” he said.

And ARCO had two contingencyplans: an extra winter to complete the

HDD crossing as a cushion in the projectschedule and an investigation of apipeline bridge.

He urged caution in applying the expe-rience of the Colville crossing to othersites, especially Nigliq.

“The geotechnical requirements ofeach site are different, and the twopipelines are fundamentally different,”Kozisek said, with Alpine transportingsales-quality oil processed to trans-Alaska oil pipeline specifications and thepipeline from CD-5 transporting three-phase fluid (oil, gas and water).

“The corrosion rates are typicallymuch higher in three-phase pipelines andflowlines,” he said.

He noted an assumption by the Corpsof Engineers that “the Colville Rivercrossing is an analog proving the techni-cal feasibility of the (Nigliq Channel)project.”

“This is an oversimplification and maybe incorrect,” he said. “Flow studies,including dynamic modeling, need to beperformed to see if an HDD crossing maybe constructed and still provide adequateflow assurance. Flow of processed crudeoil delivered by pumps is a much differentsituation than three-phase flow poweredby well pressure.”

Overall, “the reliability (certainty ofdesign) of an aboveground crossing isgreater than that of an HDD crossing,” hesaid.

Containment, incident responseContainment, the casing of a pipe

within another pipe, appears an obviousway to add to the line’s integrity, Koziseksaid, but may not be upon closer inspec-tion, with most examples for situationsvery different than the Nigliq Channel.

Pipeline builders evaluated pipe-in-pipe options for Northstar, Liberty andOooguruk, but those are not good analogsbecause they are “relatively shallowtrenches in ocean environments.”

A better comparison is cased water-way, road and railroad crossings, butthere the move has been from cased touncased crossings, he said.

“The promises of secondary contain-ment have to be balanced against thepractical problems of barriers to inspec-tion and monitoring and ‘indeterminateconditions’ that exist between the innerand outer walls,” Kozisek said. Thedesigners of the Colville Alpine crossingattempted to address the issues but allwere partial solutions, he said.

For both HDD and aboveground cross-ings at Nigliq there are advantages anddisadvantages in the area of containmentand additional engineering is needed todetermine a clear choice, Kozisek said.

Because the aboveground crossing ofthe Nigliq Channel includes a high-quali-ty vehicle bridge, access is provided forconstruction equipment and emergency toareas across the channel, making theaboveground crossing “a strongly pre-ferred alternative in this category,”Kozisek said.

Overall, the aboveground crossing“has major advantages for environmentalprotection in six of seven subject areas,”he said.

From the perspective of a pipelineengineer, Kozisek said, “The decision isclear. For the Nigliq crossing, the above-ground crossing offers the greatest overallbenefits for environmental protectionbecause it best accommodates the all-important need to mitigate spill risks at awaterway,” thus providing the least envi-ronmentally damaging practical alterna-tive for the site. �

PETROLEUM NEWS • WEEK OF AUGUST 7, 2011 13

continued from page 7

NIGLIQ LINE

Contact Kristen Nelson at knelson@petroleumnews.com

opment.API thinks that a minimum of six

months are required to collect and ana-lyze comments on the rules, a timeframethat would push the final rule decisionbeyond the currently scheduled date inFebruary 2012, Fang said. �

continued from page 11

AIR STANDARDS

Contact Kristen Nelson at knelson@petroleumnews.com

NATURAL GASDNR issues ROW lease for ASAP project

The Alaska Gasline DevelopmentCorp. said July 28 that Department ofNatural Resources Commissioner DanSullivan has signed a right-of-way leaseagreement with AGDC, granting accessto state land for potential developmentof a 737-mile natural gas pipeline fromthe North Slope to Cook Inlet.

AGDC was created by House Bill369 and tasked with developing a planfor the Alaska Stand Alone Pipeline, aproject which would ship North Slopenatural gas and natural gas liquids via a24-inch-diameter pipeline to supplyFairbanks and Southcentral.

AGDC submitted a right-of-waylease application to the State PipelineCoordinator’s Office in March.

Upon receipt of the completed appli-cation SPCO issued a comprehensiveright-of-way lease, which was acceptedand signed by AGDC President DanFauske.

Fauske said in a statement thatreceipt of the state right-of-way lease“is a major milestone in the work com-pleted and the progress made on theASAP project this past year.”

The state right of way covers morethan 400 miles of the route; the projectstill requires a federal right-of-waygrant and rights of way from privatelandowners along the route.

—PETROLEUM NEWS

14 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

Do you have an extra laptop you’d be willing to part with? No, I’mnot adding to my own stockpile of consumer electronics or trying tostrike it rich on the pawn shop circuit. Rep. Les Gara is working withFacing Foster Care Alaska to collect laptops for foster youth. Laptops are a critical tool for foster youth to keep up with schoolwork and stay connected with family and friends while theyare moved to different homes and schools.

If you are interested in donating a laptop, please make sure it isfully functional and meets the following standards:

Is in excellent working order;Is no more than 4 years old;Has a word processing program;Does not need any repairs.

For more information, or to donate a laptop, please contact eitherRep. Gara’s office at (907) 465-2647, or Amanda Metivier at FacingFoster Care Alaska at (907) 230-8237.

Laptops for Foster Kids

ENVIRONMENT & SAFETY

Oiled ring at FS-2 flare pit removedCleanup work at the flare containment pits at Flow Station 2 was completed July

28. The Alaska Department of Environmental Conservation’s Division of Spill

Prevention and Response said July 29 that 27 spill responders worked two 12-hourshifts to remove the oiled bathtub ring around the water edge of the gravel-bermedflare pits after a release was discovered July 21.

A BP Exploration (Alaska) employee discovered the release of produced fluids andcrude oil in the primary flare containment of the Flow Station 2 facility in the PrudhoeBay unit the afternoon of July 21. DEC said BP estimated that 200 gallons of producedfluids were released into three of the four freshwater filled flare containments at FS-2, including some 140 gallons of produced water and 60 gallons of crude oil.

DEC said the three flare pits had a bathtub ring of black oil varying from two to 14inches, with sheen observed in the water.

Spill responders used a combination of mechanical and manual recovery tactics tocontain and remove the oiled sediments from the fare pits. Some 120 cubic yards ofvisually stained gravel was removed from the area.

DEC said BP completed the corrosion inspection of the six-inch liquid flare linewhich was taken out of service and functionally bypassed into other flare lines.

DEC said BP had completed its technical reviews and was in the process of return-ing FS-2 to production on July 29.

—PETROLEUM NEWS

Subsistence polar bear quota affirmedA subsistence quota of 58 polar bears per year has been affirmed for the Alaska-

Chukotka polar bear population. The U.S. Fish and Wildlife Service said Aug. 2 that the affirmation came at a July

27-29 meeting of the U.S.-Russia Polar Bear Commission. The commission includesrepresentatives from the U.S. and Russian Federation representing federal, state andNative interests in polar bear conservation and management.

The goal of the meeting, the third the commission has held, was to continue imple-mentation of a bilateral treaty for the shared Alaska-Chukotka polar bear populationwhich inhabits the Bering and Chukchi seas.

U.S. Fish and Wildlife said the commission affirmed a quota of 58 polar bears peryear to be shared between the two countries. The quota, established in June 2010, isintended to protect the ability of the Native peoples of Alaska and Chukotka to takepolar bears for traditional subsistence purposes and ensuring that the harvest is sus-tainable.

—PETROLEUM NEWS

� E X P L O R A T I O N & P R O D U C T I O N

July ANS productiondown 19% from JuneMaintenance shutdown of trans-Alaska oil pipeline in mid-monthplus other maintenance results in July average of only 462,407 bpd

By KRISTEN NELSONPetroleum News

A laska North Slope crude oil produc-tion plunged in mid-July due to a

planned maintenance shutdown of thetrans-Alaska oil pipeline, hitting 209,193barrels per day July 16, the day the shut-down began, and 194,189 bpd on July 17,the day the 36-hour shutdown ended.

Proration around that shutdown, com-bined with ongoing maintenance at theLisburne field and the beginning of work atFlow Station 3 on the eastern side ofPrudhoe Bay, resulted in an average of462,407 bpd from the North Slope in July,down 18.9 percent from an average of570,173 bpd in June. There was alsoplanned maintenance in June, bringing pro-duction down from a May average of604,509 bpd.

Except where noted, volumes are fromthe Alaska Department of Revenue’s TaxDivision, which tracks production by majorproduction centers and provides daily pro-duction and monthly averages.

The largest drops in production were atPrudhoe Bay, which averaged 204,492 bpdin July, down 96,648 bpd from a June aver-age of 301,140 bpd (a 32 percent decline)and at Lisburne, at 8,683 bpd down 48 per-cent from a June average of 16,718 bpd, adrop of 8,035 bpd.

Flow Station 2 at the BP Exploration(Alaska)-operated Prudhoe Bay field wasdown for about a week at the end of Julyfollowing a release of produced fluids andcrude oil in the primary flare containmentJuly 21. (See story in this issue.)

FS-2 came back up following resolutionof the flare issue.

A planned maintenance shutdown atFlow Station 3 at Prudhoe began at the endof July.

Prudhoe Bay includes production fromAurora, Borealis, Midnight Sun, Orion andPolaris.

The BP-operated Lisburne field wentdown for scheduled maintenance in mid-June; production began again July 22. Bycomparison with June and July, Lisburneaveraged 26,342 bpd in May

The largest month-to-month increase inproduction, 6,489 bpd in July compared to908 bpd in June, was at the BP-operated

Endicott field. Endicott had been down forplanned maintenance all of June, with theonly barrels coming through the Endicottpipeline those from Badami, the farthesteast field on the North Slope.

Endicott production began to ramp upJuly 7, and peaked at 9,418 July 19.

Revenue does not break out Badamiproduction figures but the Alaska Oil andGas Conservation Commission providesdata by field, although on a delayed basis.June data from AOGCC for Badami showsan average of 1,208 bpd.

The only other North Slope field to havea July-over-June production increase wasthe ConocoPhillips Alaska-operatedKuparuk River field, which averaged137,027 bpd in July, up 0.7 percent from aJune average of 136,131 bpd. Kuparukincludes production from satellites atTabasco, Tarn, Meltwater and West Sak, aswell as production from the PioneerNatural Resources Alaska-operatedOooguruk field and the Eni-operatedNikaitchuq field.

AOGCC data for June production fromNikaitchuq shows an average of 6,375 bpd;the June production average for Ooogurukwas 7,825 bpd.

Production from the BP-operated MilnePoint field averaged 20,599 bpd in July,down 10.3 percent from a June average of22,968 bpd. Milne includes Sag River andSchrader Bluff production.

The ConocoPhillips-operated Alpinefield averaged 72,338 bpd in July, down 8.1percent from a June average of 78,698 bpd.Alpine includes satellite production fromFiord, Nanuq and Qannik.

The BP-operated Northstar field aver-aged 12,779 bpd in July, down 6.1 percentfrom a June average of 13,610 bpd.

The temperature at Pump Station 1 onthe North Slope averaged 49.7 F in July,compared to 39.9 F in June.

Cook Inlet production averaged 10,662bpd in July, down 4.2 percent from a Juneaverage of 11,125 bpd.

ANS crude oil production peaked in1988 at 2.1 million bpd; Cook Inlet crudeoil production peaked in 1970 at more than227,000 bpd. �

Contact Kristen Nelson at knelson@petroleumnews.com

this and it was important for him to knowand understand where my priorities were.I do think the president and his immediatestaff understand the importance ofincreased domestic production to theeconomy, to the national security. But I dothink you have some within the adminis-tration who are fundamentally, ideologi-cally opposed to how we might furtherthat domestic production. So when thepresident says that he thinks it’s importantthat we increase our domestic production,he supports the development, I think heacknowledges the significance of that toour economic base and to the nationalsecurity component of that. It’s one thingto say you’re supportive of it, but it’sanother thing to encourage action, to real-ly facilitate action. This is where we arehung up within this administration.Sometimes it feels like it’s just a continu-ous game of whack-a-mole. We make alittle progress in one area, then anotherissue crops up, another agency comes upwith an objection that furthers slows orstalls things. As much as the presidentmight be encouraging, there is resistance.I’ve had similarly positive and encourag-ing meetings with Secretary (Ken) Salazar.He and I served together in the Senate. Icall him my friend. Coming from theWest, he understands resource develop-ment. We’ve had many, many long con-versations about how we might do more tofacilitate our energy production in Alaska,being sensitive to the environment, butlet’s make it happen. I think it’s fair to saythat the secretary himself has been frus-trated with what he sees coming out ofother agencies or what he sees coming outof his own department when we can’t getthings moved off center. Good intentions,but it has got to translate into action.

Petroleum News: Let’s speak to thatmore. Do you find it odd that the federalgovernment, regardless of the administra-tion, holds lease sales but $5 billion or $6billion later Shell or ConocoPhillips can’tmove forward?

Murkowski: Again, you have to ask thequestion is the statement being madebecause the president and secretary aresaying OK, these are important and wewill show how committed we are by offer-ing up these lease sales; we are not the badguys. Then you can’t get the permitsthrough the administration’s agencies toallow the process to move ahead. It doesappear there is some inconsistency, per-haps a lot of inconsistency, and NPR-A isa perfect example. Folks have been sayingfor years, if you can’t drill in ANWRmove over to the National PetroleumReserve-Alaska. Just look at the name.Then when Conoco attempts to make thateffort, they are held up by the issuance ofa permit for a bridge. Then Shell sittinghere four to five years later, billions ofdollars later waiting for a permit. It’s onething to offer up leases, but it’s anotherthing to encourage action through the reg-ulatory process. That’s where we seem toget hung up at every turn.

Petroleum News: You noted ANWR.Why do you keep pushing this? Is it reallyworth the fight?

Murkowski: It is because of the greatopportunity that we have in ANWR. Lookat the estimates. You’re sitting on 10.5 bil-lion barrels of oil potentially that thiscountry needs, that our oil pipeline needs,sitting at less than half full right now. Justbecause it’s hard, just because the politicsare against us, doesn’t mean we shouldn’tcontinue to raise the opportunity thatANWR presents as an option for us as a

nation. I do think we are seeing our effortsshift in the popular opinion on this, partic-ularly when they look at the prices at thepump. They look at that and say, ‘whatelse can we be doing?’ Then you havefolks stand up and say we do have oppor-tunities to do more in this country. ANWRis a significant reminder of what we cando. I’m not giving up on this just becauseit’s a tough initiative. I think we have anopportunity in the House. I know we havethe votes over there. It’s a tougher lift herein the Senate. It’s an effort that needs to bemade. I’m not going to back off of it. Iknow where the president is on this. Heneeds to know where I am as an Alaskanand as an American interested in increas-ing domestic production.

Petroleum News: You’ve been address-ing Arctic issues, whether in Greenland orGirdwood. Would you please talk aboutyour position on Arctic development?

Murkowski: We’ve always been awareof the opportunities up there. It’s nice toknow that the rest of the country isbecoming more aware, hopefully begin-ning to appreciate that we are an Arcticnation. You mentioned Greenland. Thefact that Secretary (of State Hillary)Clinton went to head the U.S. delegationalong with Secretary Salazar and myselfwas incredible significant for us as anation. Never before had a secretary ofState, or a cabinet member or a senatorattended an Arctic council meeting. Itprobably generated more interest amongthe Arctic nations that were there than itdid here at home. Other Arctic nationshave been waiting for the day that theUnited States was finally going to wakeup and say there are some opportunities upthere and say we are an Arctic nation. Itmeans the federal government is finallystepping up to be part of the discussionthere.

The Arctic Imperative, I was reallyimpressed with what (Alaska DispatchPublisher) Alice Rogoff and her team puttogether in Girdwood. We joked that thesewere the best and the brightest in the

country on the issue of the Arctic. Theonly problem is we need more people thatare focused on it and consider themselvesto be Arctic experts.

We’ve got to be able to reduce the reg-ulatory uncertainty we are facing, not onlyin the Arctic but within the country, thatcould inhibit some of the investment.

There was a lot of discussion aboutwhat we need to be doing here in theSenate toward the ratification of the Lawof the Sea. I continue to work that as aninitiative.

Most people realize the air has beensucked out of the room with the debtdebate, so we haven’t tended to too muchother Senate business of late.

We need to become a signatory to thatconvention. We are the only Arctic nationthat hasn’t signed on. I think we put our-selves at a disadvantage if we have notceded to it.

Petroleum News: Why is Law of theSea that important?

Murkowski: It adds certainty, most def-initely, to the maritime boundaries. Ibelieve it’s imperative for us to be a par-ticipant in what is happening not onlywithin the Arctic because Law of the Seais more than just Arctic, but failing to be aparticipant then we lose a seat at the tablewhen we are talking about our extendedcontinental shelf. We lose some of oursovereignty. We’ve got to figure out howwe get at the table and the way we get atthe table is through ratification.

Petroleum News: There is pushback onthe Keystone pipeline coming into the U.S.and bringing oil from Canada. Somebelieve whether it’s approved or not couldspeak broadly to the administration’s ener-gy policies. What are your thoughts on theline?

Murkowski: There is a recognition thatwe’ve got an opportunity to gain aresource from our northern neighbor, acountry that we have good strong relation-

ships with. There are some who suggestthat we don’t want the Keystone linebecause it will be bringing a product outof Canada that comes from the tar sandsand it’s more dirty than other energy prod-ucts. There are some who will suggest toyou who will say it’s better to bring in orimport oil from a country like Venezuelathan it is from a country like Canada ifCanada is sending us what they term dirtyoil. I view our national security vulnerabil-ity because of our reliance on foreignsources oil. I’d much rather have a situa-tion where we have a neighbor likeCanada who is also concerned aboutensuring a clean environment than to sug-gest we don’t want to have this Canadianoil coming down this Canadian pipeline.It’s not as if Canada is going to shut itdown because we won’t buy it.

Petroleum News: Do you get a sensethat some folks in D.C. don’t understandthe value of TAPS?

Murkowski: I do. I think there arethose who have taken Alaska oil forgranted. We’ve been quietly supplying thecountry for 30 years now. At one point,we were supplying 20 percent of thenation’s domestic supply. Obviously thatis down dramatically. It’s been kind ofchugging along there. People don’t thinkthat much about it. This is a challenge tous. It’s a challenge to make sure people inthe Lower 48 understand what it is wehave been providing, that we have a con-tinued opportunity to provide more, butwe’ve got to get this pipeline filled up.It’s capable of 2 million barrels a day. It’sdown to 640,000 barrels a day. We knowwhat happens if throughput shrinks muchfurther, that we could be looking at a situ-ation where TAPS is inoperable. I don’twant the Lower 48 to wake up and saywhat do you mean you’re shutting itdown? �

PETROLEUM NEWS • WEEK OF AUGUST 7, 2011 15

continued from page 4

MURKOWSKI Q&A“ANWR presents as an option forus as a nation. I do think we are

seeing our efforts shift in thepopular opinion on this,

particularly when they look at theprices at the pump.”

—U.S. Sen. Lisa Murkowski, R-Alaska

Contact Steve Quinn at squinnwrite@gmail.com

16 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

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CH2M Hill awarded Anchorage municipality contract Anchorage Mayor Dan Sullivan said Aug. 2 in an Anchorage Update Newsletter that the

municipality has been talking for years about transforming the city’s internal structure tobecome more efficient. One area that he has identified as a potential cost saver is the city’soperations and maintenance.

Additionally, Mayor Sullivan announced the Municipality of Anchorage’s intent to awarda contract to CH2M Hill for a thorough assessment of MOA operations.

CH2M Hill will be responsible for developing an implementation plan for each O&Mfunction and for prioritizing projects based on anticipated savings. The work will bephased, with the contractor first identifying “quick wins” that would save MOA moneyimmediately. Once plans are developed, CH2M Hill will present recommendations, estimat-ed implementation timelines, associated costs, and benefits to municipal leaders.

The contractor’s scope of work includes fleet maintenance, which is responsible foracquiring, managing, maintaining, and disposing of more than 1,100 vehicles and equip-ment units, including police vehicles and heavy equipment for road maintenance, as well asfleet maintenance for the Fire Department and Public Transportation.

Sullivan said he is confident that the contractor’s recommendations will provide aroadmap for delivering the same excellent service with substantial savings to the taxpayer.

For more information visit www.muni.org.

Crowley names Michel VP of safety and learningCrowley Maritime Corp. said July 27 that Suz Michel has assumed

the role of vice president of safety and learning, a position that givesher oversight for the Safety, Security, Quality & Environmental andPeople Development & Learning groups. Michel, who will relocate fromSeattle to Jacksonville, will continue to report to Carl Fox, senior vicepresident of corporate services.

In her new role, Michel will lead the blending of these two groupsunder a singular managerial focus to promote synergies in the deliveryof training, compliance and operational excellence. Also under Michel’sleadership, the SSQE team will continue to ensure that Crowley’s safetyculture — the company’s most important core value — is applied toall areas of business and embodied by all employees. Additionally,Michel will ensure that another important company value, Our People, continues to promotedevelopmental opportunities for company employees.

In 2004 Michel joined Crowley in an SSQE role focused on regulatory safety training. In2007, she was promoted to director of PDL. During her tenure with Crowley, Michel has beeninstrumental in shaping the department and reinforcing Crowley’s core value, Our People.

see OIL PATCH BITS page 17

Oil Patch Bits

SUZ MICHEL

Anchorage Economic Development Corp.First, Popp said, employment in

Southcentral could soon increase consid-erably.

“We’re treating it more as a statisticalanomaly than a loss of employment herein Anchorage,” Popp said about the dip inAnchorage oil industry employmenttotals.

That’s because, Popp said, Cook Inletis on the verge of its most active periodsince the late 1990s, when Forcenergyinstalled the Osprey platform and CrossTimbers Oil (now XTO Energy, anExxonMobil subsidiary) acquired theMiddle Ground Shoal field.

Recent announcementsThat assessment is the result of several

recent announcements, Popp said.First, Escopeta Oil Co. expects to have

a jack-up rig in Cook Inlet in August andBuccaneer Energy Ltd. expects to bringanother jack-up to the region next year.

Second, the major independent ApacheCorp. continues to conduct early explo-ration work on its newly acquired CookInlet leases and Houston-based HilcorpEnergy Co. recently acquired the assets oflongtime Cook Inlet player Union Oil Co.of California.

While neither Apache nor Hilcorp haverevealed details plans for Cook Inlet, Poppnoted that both have suggested that they

each plan to make significant investments.“All four companies are very motivat-

ed in their search for oil, and oil is goingto generate a lot more jobs for the CookInlet than gas production,” Popp said.

Combined, those programs could easi-ly offset the jobs lost from the shutdown ofthe liquefied natural gas export terminal inNikiski, at least in numeric terms, Poppsaid, noting that it is still important tomake sure the actual workers find new

a gas perspective,” he said.ConocoPhillips made a work commit-

ment of C$66.7 million for a parcel of about216,000 acres adjacent to Husky’s sales-leading bids of C$188 million each for twoparcels of about 216,800 acres each.

Husky said it is attracted by the prospec-tive nature of the land, which is 50 milesfrom the existing Enbridge pipeline whichtransports 34,900 barrels per day of light oilfrom Norman Wells to Zama in northwestAlberta.

Asked by an analyst why Husky paidtwice as much on a per-acre basis as otherbidders for similar properties, Husky ChiefOperating Officer Rob Peabody said hiscompany has actively explored the CentralMackenzie Valley for more than a decadeand has been involved in two discoveries.

Husky’s existing exploration leases inthe region include a significant discoverylicense for the 2004 Summit Creek B-44natural gas and light oil discovery welldrilled into two Devonian-age reservoirs. Italso operates a lease over Tulita DistrictLand Corp. freehold parcels. The SummitCreek well operated by Husky tested at 20million cubic feet per day of gas and 6,300bpd of oil.

In 2007, Husky, with a 75 percent stake,and International Frontier Resources, with25 percent, bid C$4.89 million in workexpenditures to secure a license farthersouth.

In 2004 (with a 29.48 percent workinginterest), Husky was part of a joint venturewith Northrock Resources (32.5 percentinterest) which bid work commitments ofC$24.8 million for a 224,000-acre parcelabout 55 miles south of Norman Wells.Other partners were EOG ResourcesCanada 26.4 percent, Pacific RoderaEnergy, 6.62 percent and InternationalFrontier, 5 percent.

In 2008, Husky, as operator with a 75percent working interest, drilled theDahadinni B-20 well to a total depth ofalmost 8,000 feet, logged and abandonedthe well as a dry hole. The Northern Oil and

Gas Directorate reported that the parcel wassurrendered in 2010.

Complement existing portfolioPeabody said Husky believes the new

properties complement existing portfolio inthe Central Mackenzie Valley, while itsspending commitment is what it will cost to“assess the lease and hopefully move for-ward.”

Imperial Oil (69.6 percent owned byExxonMobil) and ExxonMobil’s whollyowned Canadian subsidiary made a com-bined commitment of C$43 million, divid-ed equally between two parcels totaling444,000 acres.

Imperial offered no further insight in itssecond-quarter earnings report beyond not-ing that the licenses are in the SummitCreek area, while Shell Canada has notcommented on the thinking behind its com-bined bids of C$43.4 million for threeparcels totaling 498,000 acres.

The latest spending spree on leases,coming amid an uncertain outlook for theMackenzie Gas Project, has stirred specula-tion that Husky may have made a substan-tial oil find in the Central Mackenzie Valleyclose to Imperial’s 1920 Norman Wells dis-covery estimated to have held 630 millionbarrels of original oil in place, but which isnow operating well short of its 45,000 bpdcapacity.

Henry Sykes, president of MGMEnergy, which partnered with 6362 NWTLtd. to make made work commitments ofC$5 million for three Central MackenzieValley licenses totaling 254,000 gross acres,and Pat Boswell, chief executive officer ofInternational Frontier, are among those whothink the target is narrowing to a liquids-rich shale play.

Boswell ruefully conceded to PetroleumNews that his company had lost out to the“big boys” in the bidding and said it willnow have to review its next moves in theregion.

He said that “sooner or later somebodyis going to find another Norman Wells” inthe area. �

PETROLEUM NEWS • WEEK OF AUGUST 7, 2011 17

Programs have included leadership, supervision and employee development, as well as safetytraining for crew and terminals.

Calista Corp. announces sale of The Cordova TimesCalista Corp. said Aug. 2 that it is pleased to announce the sale of The Cordova Times to

Jennifer Gibbins. Gibbins is currently the editor for the weekly newspaper and will assumeownership effective late August. The Cordova Times is one of the six weekly newspapers pub-lished by Alaska Newspapers Inc., a wholly owned Calista subsidiary.

Gibbins has served as the paper’s editor for the past year, and has lived in Cordova forthe past eight years. She is looking forward to sharing the extraordinary qualities of the com-munity with the rest of Alaska and the world.

“It is a pleasure to know the legacy of The Cordova Times will continue in such capableand dedicated hands,” said Calista Corp. Senior Vice President Margaret Nelson.

“I am honored and excited by the opportunity to help carry on the tradition of TheCordova Times which has been a part of the town for over 100 years,” said Gibbins. “And Iam thankful for the enthusiastic support of the community and assistance Calista has provid-ed to me in helping make this ownership possible. Everyone involved has been very sincerein wishing the paper to continue.”

Editor’s note: All of these news items — some in expanded form — will appear in thenext Arctic Oil & Gas Directory, a full color magazine that serves as a marketing tool forPetroleum News’ contracted advertisers. The next edition will be released in September.

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MAC BUZZ FINANCE & ECONOMYHearing delayed on BP probation matter

An evidentiary hearing set for Sept. 6 on BP Exploration (Alaska) Inc.’salleged probation violations has been rescheduled for Oct. 11.

The change was made due a conflict in U.S. District Judge Ralph R. Beistline’scalendar, court records show.

BP Alaska was put on probation for three years after pleading guilty to a mis-demeanor violation of the Clean Water Act in connection with a major pipelineleak in 2006 in the Prudhoe Bay oil field.

Near the end of the probationary period, in November 2010, the company’sprobation officer, Mary Frances Barnes, petitioned the court to revoke BP’s pro-bation due to violations.

The violations center on a November 2009 incident when a pipeline carryingoil, gas and water from wells to the Lisburne Production Center ruptured, dis-charging about 13,000 gallons of liquid onto the tundra.

BP has denied violating its probation. If found in violation, the company couldface more probation and fines.

The evidentiary hearing is expected to last three to five days.—WESLEY LOY

continued from page 1

JOB GROWTH

see JOB GROWTH page 18

“All four companies are verymotivated in their search for oil,and oil is going to generate a lotmore jobs for the Cook Inlet thangas production.” —Bill Popp, CEO of the

Anchorage Economic Development Corp.

Contact Gary Park through publisher@petroleumnews.com

18 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

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ratified the convention, and expressedwhat they see as the downside of the lackof U.S. participation.

In written testimony to the subcommit-tee, Ambassador David Balton, deputyassistant secretary of state for oceans andfisheries, said that the convention givesnations exclusive economic zonesextending 200 miles offshore, with rightsover natural resources including fisheries,energy and minerals, and with the possi-bility of continental shelf extensionsbeyond 200 miles if certain conditions aremet.

“The United State is likely to have oneof the world’s largest continental shelves,potentially extending beyond 600 milesoff Alaska,” Balton wrote.

Balton told the subcommittee thatalthough the United States is investigat-ing and collecting data that might supporta claim for an extended continental shelf,the U.S. cannot complete the procedurefor securing title and international recog-nition of a claim without being a party tothe convention.

“All the other countries of the Arcticare party to the convention and they areusing a mechanism in the convention toperfect their claim to areas of the seafloorin the Arctic and elsewhere,” Balton said.

International treatyThe Convention on the Law of the Sea

consists of an international treaty establish-ing rules for all aspects of ocean use,including the rights of passage in or overocean waters; the territorial sovereignty ofcoastal nations; the geographical limits ofterritorial seas and economic exclusionzones; and the environmental protection ofthe oceans. The convention includes proce-dures for the peaceful resolution of dis-putes regarding the use of the world’soceans. The convention also requires thatthe International Seabed Authority, consist-ing of representatives from the states thatare party to the convention, administersmining in the deep seabed beyond nationaljurisdictions.

The United States was deeply involvedin the negotiations leading to the formula-tion of the convention. But when the con-vention opened for signature in 1982,President Reagan objected to some of theconvention provisions relating to deepseabed mining. In the early 1990s strongpressure to resolve the remaining problemswith the convention led to the negotiationof a convention amendment. In 1994President Clinton said that this amendmenthad fixed the deep seabed mining issues.

In 1994 the Law of the Sea Conventionwent into effect, followed in 1996 by theamendment addressing the deep-sea min-

ing controversy. Since then 162 nationshave ratified the convention; 141 nationsand entities have ratified the amendment.

U.S. concernsBut U.S. critics of the treaty have

argued that the convention underminesU.S. sovereignty and that customary inter-national law already protects U.S. interests.Some have also expressed concern aboutthe potential for the terms of the conven-tion to compromise U.S. security interests.And although the U.S. Senate ForeignRelations Committee has twice voted infavor of the treaty, the Senate has neverapproved ratification of either the conven-tion or the amendment.

Balton told the Senate subcommittee onJuly 27 that the problem with depending oncustomary international law for determin-ing ocean usage rights is that rights undercustomary law, being dependent on thepractices of individual states, can be erod-ed over time.

“Only as a party to the convention canwe lock in these rights,” Balton said.

And, in written testimony to the sub-committee, Rear Admiral David Titley,oceanographer of the U.S. Navy, said thatthe convention provides the rule of law thatwould best help U.S. armed forces protectU.S. Arctic interests.

“Accession to the U.S. Convention onthe Law of the Sea is something the Navybelieves in very strongly,” Titley told thesubcommittee.

Law enforcement need“I’ve never understood the resistance to

this,” said Admiral Robert Papp, comman-dant of the U.S. Coast Guard. “This treatyseems to me to give us great understandingand predictability in how we deal with thefreedom of the seas and how we operate onthe seas. And as a law enforcement agencythat’s responsible for operating within thelaws, this is just vital for us to carry out ourresponsibilities.”

Both Papp and Titley commented that atinternational meetings involving maritimeissues one of the first questions asked iswhy the United States has not ratified theConvention on the Law of the Sea.

“Other countries are, frankly, lookingfor the U.S. to be able to show leadership,and it’s hard to show leadership in thistreaty when we are not a party to it,”Titley said. �

continued from page 1

SEA LAW

Fisheries and Coast Guard on July 27.Rear Admiral David Titley,

oceanographer of the U.S. Navy, toldthe subcommittee that the U.S. mili-tary, including the Navy, had recentlyattended an Arctic militaries roundtablemeeting in Oslo, Norway, to startestablishing relationships at a seniorlevel between the military organiza-tions of the eight Arctic nations.

Russia was represented by its borderguard, Titley said.

“We have good relations withthem,” he said.

Titley said that the group plans towork on issues of common concern.

“We decided to hold another meet-ing in about a year, and we are startingworking groups at the captain level tostart working specific agendas,” Titleysaid.

Admiral Robert Papp, commandantof the U.S. Coast Guard, said that theCoast Guard is in the process of estab-lishing navigation rules for waters thatare currently ice covered. One particu-lar issue is the control of ocean trafficin the Bering Sea, with the establish-ment of international rules requiringnegotiations with Russia.

The U.S. Coast Guard has beenexchanging personnel with theRussians, to enable cooperation andmutual familiarity with each nation’sprocedures, Papp said.

Papp said that there are several ven-ues for international cooperation overthe use of Arctic sea routes. Venuesinclude the Arctic Council and theNorth Pacific Coast Guard Forum, hesaid.

—ALAN BAILEY

continued from page 1

COOPERATION

industry jobs.

North Slope jobs growthThe North Slope presents an almost

inverse situation.While the North Slope is seeing an

“appreciable” increase in employment,Popp said, it appears to be associated withmaintenance and development rather thanexploration work.

So although the industry is addingemployment, “when you look at thelonger term view of barrels in the TAPSsystem, we still have not addressed that,”

Popp said.Historically, oil industry employment

in Alaska follows oil prices more closelythan any other factor, including produc-tion. While the delivered price of AlaskaNorth Slope crude oil was around $75 perbarrel last summer, it is currently tradingabove $110 per barrel.

—ERIC LIDJI

continued from page 17

JOB GROWTH

Contact Alan Bailey at abailey@petroleumnews.com

Contact Alan Bailey at abailey@petroleumnews.com

But U.S. critics of the treaty haveargued that the convention

undermines U.S. sovereignty andthat customary international lawalready protects U.S. interests.

Contact Eric Lidji at ericlidji@mac.com

Historically, oil industryemployment in Alaska follows oil

prices more closely than any otherfactor, including production.

Walker said AGPA’s All-Alaska GaslineProject is predicated on state ownership ofthe gas pipeline, which would be built andoperated by the private sector. There wouldbe a spur line to Southcentral Alaska.

“The real benefit of the LNG project,paid for by long-term contracts in the Asianmarkets, is that all Alaskans can benefitfrom our resources,” Walker said.

AGPA said it sought the analysis byWood Mackenzie to help Alaskans, theadministration and the Legislature, “under-stand the difference between the risingdemand for LNG in the world marketplaceas opposed to the oversaturation of the nat-ural gas markets in Canada and the Lower48 in light of abundant supplies of shalegas.”

Liquefaction in ValdezWood Mackenzie described the project

as a large-volume pipeline from the NorthSlope to a 2.7 billion cubic feet per day liq-uefaction facility in Valdez, and said AGPAcontracted for an evaluation of “the eco-nomic competitiveness of Alaskan LNGexports relative to other proposed liquefac-tions projects at various stages of develop-ment.”

The report said that with oil prices atabout $100 a barrel, and expected toremain at that level for an extended periodof time, “the Alaskan LNG export opportu-nity appears today to make economicsense.” With Asian oil-indexed LNG pric-ing delivering product to regasification ter-minals at more than $15 per million Btu,and Canadian and Lower 48 LNG poten-tially deliverable to Asia at a cost of about$10 per million Btu, Wood Mackenzie esti-mated that Alaska LNG could be deliveredat below $10 per million Btu.

North of $75Wood Mackenzie said the numbers gen-

erally work for an Alaska LNG projectwith a global oil price north of $75 per bar-rel and Asian firm contract pricing at 13percent or more oil indexation. Firm con-tracts today are indexed at approximately14.85 percent, the report said.

The proposed Alaska LNG exportwould have a substantial cost advantagerelative to possible competing projectsbecause Alaska LNG would use gas cur-rently used for re-injection.

With a startup in 2021 and a project lifeof 30 years, royalties of 12.5 percent andstate taxes starting at 25 percent post-roy-alties, the project could yield state revenuestotaling between $220 billion and $419 bil-lion over the project life.

Wood Mackenzie did point out thatgood numbers are not the only requirementfor a successful LNG project.

“While we do not address them, thereare a number of commercial challengesassociated with all liquefaction projects,”the firm said in the report. “Economics areimportant, but commercial issues such asthe scale of value chain requirements(pipes, storage, etc.), buyer risk tolerance,financing arrangements, etc. are critical.”

Long-term supplyBut projects are needed. Wood Mackenzie said there is a short-

age of “proximate LNG” in the Pacificbasin and a number of projects, includingAlaska LNG, will complete to supply thoselong-term requirements, with U.S. LNGexport potential expected to come online in2016 and Canada LNG export potential in2018.

Demand for LNG is trending upward,the report said, as new supply is driftingout in time. The market could be tightenedfurther by operational uncertainty. A graph

of demand in the report shows uncontract-ed demand opening up in 2012-13, withpotential Pacific projects which don’t yethave a final investment decision starting tocome online in 2016.

Australia has the potential to meet 36percent of world demand through 2025,Wood Mackenzie said, with more than 7bcf per day of capacity onstream or underconstruction, another project probable forinvestment approval within 12 months andalmost a dozen more projects proposed.

May be roomBut Australian projects face rising costs,

pressuring project economics, which mightmake room for a few North Americanexport projects. In addition to the AGPAproject, there are four export projects pro-posed from western Canada and as manyfrom the U.S. Gulf and East coasts.

Wood Mackenzie said it used data fromthe Valdez LNG case from TransCanada’s2010 open season notice, with the excep-

tion of liquefaction capital expenses esti-mated at $1,200 per ton, Alaska LNG loss-es of 9.65 percent, ship cost estimated at$200 million each, ship operating costs at$15,000 per day. LNG processing losseswere estimated from the Alaska GaslineInducement Act net present value reportand liquids credit determined using $80 perbarrel netback price for LPG and volumesprovided by AGPA.

The greenfield Alaska LNG cost shownin the report is $8.50 per million Btu in2011 dollars.

The report notes that currently re-inject-ed gas offsets higher pipeline costs for anAlaska project.

Based on an estimate of $8.50, WoodMackenzie said Alaska “competes favor-ably with both proposed Australian andother North American export facilities”which haven’t yet reached final investmentdecisions.

The report said economics of an AlaskaLNG project were based on a Nymex for-

ward strip from July 5; Wood Mackenziedata from its April 2011 outlook; and test-ed against a worst case scenario with aninflation-adjusted oil price of $75 through-out the projection period.

The Nymex strip scenario, WoodMackenzie’s base case, yielded annualstate tax and royalty revenues of $2 billionto $16 billion per year, a total of $220 bil-lion over the 30-year life of the project.Based on the Wood Mackenzie price sce-nario the project would yield annual taxand royalty revenues of $3 billion to $24billion to the state, a total of $419 billionover the project’s life.

The worst case scenario, based oninflation-adjusted $75 oil, yields tax androyalty revenues to the state of $400 mil-lion to $6 billion for a total of $75 billionover project life.

—KRISTEN NELSON

PETROLEUM NEWS • WEEK OF AUGUST 7, 2011 19

0

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Annual Average Employment — StatewideAnnual Average Employment — North Slope Borough

Alaska Oil Industry EmploymentStatewide and North Slope Borough 2000-2010*

*Preliminary2010 annual average employment numbers for the North Slope Borough were not available as of the publish date for this chart

Source: Alaska Department of Labor and Workforce Development, Research and Analysis Section and U.S. Bureau of Labor Statistics

Alaska Statistics

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continued from page 1

WOOD MAC STUDY

Contact Kristen Nelson at knelson@petroleumnews.com

suits, one involving Cook Inlet Energy’sformer chief financial officer, who wasfired.

All these issues stand in contrast towhat previously had been a stream of pos-itive news from Miller and Cook InletEnergy as they advanced their Alaskaoperations.

‘Full steam ahead’David Hall, Cook Inlet Energy chief

executive, told Petroleum News on Aug. 3the recent run of difficulties hasn’t hin-dered the company’s operations in thefield.

Assembly continues in Houston on a$17.9 million rig for use on the Ospreyplatform, Hall said. It’s expected to be in

Alaska and working this coming winter.“We’ve got our heads down and noth-

ing has changed,” he said. “We’re movingfull steam ahead. Production is still flow-ing.”

Cook Inlet Energy operates the WestMcArthur River oil field as well asOsprey, which sits in the Redoubt unit.The company, with Miller’s backing,

acquired the assets in December 2009. Theprevious owner was California-basedPacific Energy Resources Ltd., which hadfiled for bankruptcy.

At the time, Miller said it paid about$4.5 million for Alaska reserves valued atmore than $325 million.

Since the purchase, Hall and Cook InletEnergy have set about reviving shut-inwells and making plans for furtherdrilling.

In an “open letter to shareholders”issued Aug. 1, Miller Energy indicated ithas four Alaska wells producing around1,450 barrels of oil equivalent per day.These include the West McArthur 5 and 6wells, which averaged a collective 847barrels per day in June, and the recentlyactivated RU-1 and RU-7 wells on theOsprey platform, which averaged 371 and239 barrels respectively during their first30 days of production.

CEO refutes ‘attack blog’Scott M. Boruff, Miller Energy’s chief

executive, wrote the open letter to explainsome recent SEC filings, and to respond towhat he called a disturbing “attack blog”seeking to discredit the company for thebenefit of short sellers. Short selling is atechnique that can profit an investor whobets correctly that a stock’s price will fall.

On Aug. 1, Miller Energy filed a Form8-K “current report” with the SECexplaining that some previously filedfinancial statements, including its Form10-K annual report filed July 29, con-tained errors and would be revised as soonas possible. The company added it didn’texpect any “material changes” to its over-all financial situation.

Boruff’s open letter also sought todefend Miller’s valuation of its Alaskaassets.

On July 28, a website called The StreetSweeper posted a long article highly criti-cal of Miller Energy, questioning the“hefty valuation” the company placed onthe assets, and its involvement in a numberof lawsuits.

The article had a disclosure at the endsaying The Street Sweeper, “through itsmembers,” in late June began establishinga short position in Miller Energy, and thatit “expects to profit on future declines inthe stock.”

In his open letter, Boruff wrote that“Miller became the target of a short sellingblog that hoped to profit from discreditingour company.”

He said his company takes “a conserva-tive approach” to its valuation and produc-tion data.

“In order to provide an accurate valua-tion of our Alaskan subsidiary, we haveconsulted extensively with independentthird parties in order to fairly and reliablyvalue those assets,” Boruff wrote.

In conjunction with a recent financingdeal, he said, an “independent reserveengineer approved by our lenders” con-ducted a review and the valuation was“consistent with” the company’s currentreserve report.

Boruff added that “not a single memberof our board of directors or senior man-agement has sold a single share of Millerstock since the Alaskan acquisition.”

Two East Coast law firms known forbringing class actions put out press releas-es on Aug. 1 and 2 announcing they were“investigating” Miller Energy for possiblesecurities violations.

Two lawsuitsAs for the implication that Miller

Energy is “riddled with lawsuits,” Boruffwrote that “any company our size will besubject to lawsuits in the ordinary courseof its business.”

He continued: “Miller is currentlybeing sued by two parties and believes thatboth lawsuits are without merit.”

In one suit, filed May 6 in federal courtfor the Eastern District of Tennessee, TroyD. Stafford is suing Miller claiming hewas wrongly fired and was denied pay,severance and rights to company stock. Alltold, he is seeking damages totaling atleast $3.47 million.

When the Alaska assets were acquiredin 2009, Stafford was part of the deal asCook Inlet Energy’s chief financial officer.

Miller Energy, in its recently filedannual report, vowed to defend the lawsuitvigorously, saying: “We believe that wehad appropriate cause to fire Mr.Stafford.”

A second suit was brought againstMiller Energy and Cook Inlet Energy onJune 15 in the federal court for the EasternDistrict of Pennsylvania. The plaintiff,VAI Inc., says it is a Wayne, Pa., financialadviser and consultant that “devoted near-ly all of its efforts, time and resources overa six-month period in 2009” to connectCook Inlet Energy with Miller and helpthem acquire “those extraordinarily valu-able oil and gas assets in the Cook Inletregion of Alaska.”

Despite this help, VAI contends thedefendants breached a contract by failingto pay it “warrants for 1,750,000 shares ofMiller stock exercisable over a four-yearperiod at $.01 per share.” �

20 PETROLEUM NEWS • WEEK OF AUGUST 7, 2011

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INLET PRODUCERCook Inlet Energy operates the

West McArthur River oil field aswell as Osprey, which sits in theRedoubt unit. The company, with

Miller’s backing, acquired theassets in December 2009. The

previous owner was California-based Pacific Energy Resources

Ltd., which had filed forbankruptcy.

Miller Energy, in its recently filedannual report, vowed to defend the

lawsuit vigorously, saying: “Webelieve that we had appropriate

cause to fire Mr. Stafford.”

Contact Wesley Loy at wloy@petroleumnews.com